How low interest rates are stimulating direct investment and lending
Low interest rates continue to impact the U.S. financial market. Ares Management, a major player in alternative investments, views this as a significant stimulus for lending, mergers, and acquisitions. The Fed’s decision to lower rates makes borrowing cheaper. This, in turn, supports investor activity and private lending.
Access to cheaper credit helps companies attract direct investment. Private credit funds offer loans with more flexible terms. For instance, despite pressure on income from lower rates, floating-rate loans remain a popular instrument.
Impact on the credit market
According to Michael Arugati of Ares Management, private lending offers higher returns than other investment options. These instruments include high-grade and sub-investment-grade bonds. Currently, spreads on private loans are approximately 225 basis points higher than those on bank and syndicated loans. This makes private lending an attractive source of income for investors.
Lower rates also accelerate the growth of fee-generating assets under management (AUM), which generate income from management fees. About 85% of Ares Management’s revenue comes from these fees rather than from performance fees, such as carried interest. This ensures business stability, even in conditions of declining returns on floating-rate loans.
The main advantages of low lending rates are:
– lower cost of borrowed capital for companies;
– increased volume of private lending;
– growth in the number of companies that can access financing on acceptable terms.
Effect on the M&A market
Cheap financing narrows the gap in price expectations between buyers and sellers. This accelerates deals in the U.S. M&A market. Investors can conduct transactions more actively and confidently.
Additionally, growth in direct investment stabilizes loan portfolios. Companies are improving their interest coverage thanks to EBITDA growth. Despite recent bankruptcies in the market, Ares Management considers them to be local events rather than a sign of a global crisis.
Low interest rates stimulate accelerated capital investment and support growth in management fee income. Thus, Ares Management views lower rates as a positive factor for business rather than a threat.
