Exclusive: China’s millions of SMEs and ‘continent-sized economy’ lure US alternative investment manager Ares

Ares Management, the largest alternative investment manager in Asia, is eyeing China’s private capital market as it aims to tap opportunities among the millions of small to medium-sized enterprise (SMEs) operating in the world’s second-largest economy.

The Los Angeles-based asset manager, which had US$395 billion in assets under management as of September 30, is very excited about the growth opportunity in China’s “continent-sized economy”.

“If you look at where GDP growth will be over the next five or 10 years, you will continue to see a disproportionate amount of growth in this region and in China specifically,” Mike Arougheti, the firm’s co-founder, director and CEO, said in an interview with the Post.

SMEs account for about 60 per cent of China’s GDP, according to government figures, and “are one of the things that is most exciting about China”, Arougheti said. “It’s hard to ignore the long-term or even medium-term opportunity.”

The total number of micro, small and medium-sized enterprises in China exceeded 52 million in 2022, according to government data.

A combination of private capital firms bringing solutions into the market and recognition from regulators and business owners will help foster the private-market ecosystem in China, mirroring the way other large markets have developed, Arougheti said.

Ares Management in 2020 bought a controlling stake in distressed asset specialist SSG Capital. The subsidiary, now called Ares SSG, has allowed the company to tap into Asia’s credit and special situations investment market.

“Hong Kong is absolutely an attractive place to do business,” Arougheti said during a visit to the city to attend a private equity and venture forum. “It’s a global financial centre with a beautiful infrastructure and easy access to mainland China and the rest of Asia.”

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While China’s economy is going through challenges like a slowdown in consumer spending, “the key is being able to navigate” the tougher business environment, Arougheti said.

“We need to see more consumption, more capital formation [and] we need to resolve some of the challenges that are happening in the real estate market.”

Such challenges can present unique opportunities for private capital managers. For example, China’s distressed property market is a near-term opportunity for private capital to come in and restructure and recapitalise struggling developers, Arougheti said.

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“I think the near- and midterm opportunity is going to be bringing flexible capital solutions into the existing installed base of real estate to help owners and developers bridge to either delivery or recapitalisation of their properties,” he said.

As it stands, Ares Management has very little existing exposure in the China property market, said Arougheti, which gives the firm “more degrees of freedom” to participate.

“You have to separate what’s happening on the ground today versus the long-term secular trends in China,” he said. “Are we going to want to continue to build capability? And are investors going to want to continue to access that market? The answer is yes.”