Ares’ Donohoe sees private lenders rush in as bank disintermediation grows

Ares Management believes the pandemic has accelerated a shift toward non-bank lenders, and that borrowers are increasingly seeking the speed of execution and a more nuanced approach to markets that a debt fund can offer.

“I think that the disintermediation of the banks, which started around the time of the global financial crisis, has now accelerated post-covid, where certain banks and insurance companies are candidly less present lenders in our space than they were historically,” Bryan Donohoe, partner and head of real estate debt at Ares, tells Real Estate Capital USA. “They’re still a big part in financing our positions, but the private lending market in CRE has grown and [private lenders] are well positioned to take the slack that exists from some of the pullback from the banking industry.”

The firm expects this shift toward non-banking lenders to continue. “Non-bank lenders can act more quickly and think more rationally, not just about the property and what it is today, but about the business plan and loan structures that we put in place,” Donohoe adds.

Speed and certainty

Timing is also a critical factor. “[Borrowers] want speed of execution and certainty that the loan terms that you put forth will be executed upon,” he says. “But they [also] want a like-minded investor to be alongside them and the alternative asset management space is providing that. This is why certain banks and insurance companies at slightly more moderate leverage are becoming less present in our space today.”

Ares is witnessing a strong period for transactions and a lot of pent-up energy for deals.

“What has been incumbent of a lot of transactions that have been consummated over the past 18 months is that velocity has mattered a great deal, as has certainty of execution,” Donohoe adds. “The traditional lenders, banks and insurance companies are continuing to be mediated by debt [providers] like us, throughout the industry.”

The firm provides senior mortgage loans, targeting a range of markets and property types. It recently began to hone in on gateway markets, more so than before the pandemic, as it responds to changes in valuations and lower leverage requirements from borrowers. Ares considers the recovery picture in these markets to be positive, and has high hopes for the office, multifamily and industrial sectors.

“The pandemic has accelerated a lot of trends that were already in place,” says Donohoe. “The movement to alternative asset managers – who have grown their footprint in the real estate debt industry and private credit generally – is part of that.”