Ares sees first real dispersion in direct lending in years

Kort Schnabel, co-head of US direct lending at Ares, told Creditflux's Credit Exchange podcast with Lisa Lee that dispersion among direct lenders is real for the first time in years, a claim that would have sounded wrong in a cycle where every lender's pitch sounded like the last one. The dispersion, he said, shows up across funding costs, document terms, and the widening gap between lenders who hold and lenders who sell.

Direct lending's growth phase was built on uniformity, with capital flooding in and managers winning deals by offering the same terms as everyone else only faster, but that model works only while there is more money than deals and breaks when the market stops growing in a straight line. What Schnabel is describing is the difference between owning the trade and being the trade: in a uniform market the lender is interchangeable and the spread is the product, while in a dispersed market the lender's pricing, documents, willingness to hold through a rough patch, and ability to say no become the product.

The most concrete place to watch the split is in funding costs: as this publication reported in late August, Ares was among four managers that priced nearly $2 billion of US CLO resets, alongside Onex, KKR and Kennedy Lewis, and the reset wave works as the permanent funding mechanism for private credit books. Managers with seasoned vehicles can reprice their liabilities at today's tighter spreads, giving them room to hold new-issue pricing without shrinking their margin, while managers without that access are left to fund new loans from higher-cost warehouses or chase yield into worse documents.

Funding cost now varies by platform, and the borrower sees it in the quote: a manager with a repriced CLO can underbid by a meaningful margin and still earn its target, while one without has to stretch to make the same math work or take the deal anyway and hope. Once that gap appears, it feeds on itself, as the cheaper-funded lender wins the better credits, making its portfolio safer and its next CLO even cheaper.

In the less visible corners of the market, dispersion shows up in documents: in a hot market terms drift toward the borrower, but in a dispersed market lenders with real demand push back, and the treatment of add-on acquisitions and EBITDA adjustments—the places where the next downturn's credit losses are born—starts to differ again. Managers who held the line on those terms in the hot years are the ones able to hold pricing now, a payout for discipline.

The line between holding and selling is becoming a defining divide: some managers originate to hold, matching assets to permanent capital vehicles, while others originate to sell, flipping loans into CLOs or secondary trades. Both models work in a rising market, but in a dispersed market the holders and sellers start to look like different businesses, and LPs need to know which one they are paying for.

For allocators, the implication is uncomfortable: direct lending has often been sold as an asset class where the spread is the return and manager selection is a rounding error, but dispersion breaks that sales pitch, and as the range of outcomes widens the average becomes a warning rather than a target. LPs who bought the category will have to start buying the firm, a harder conversation but the honest one.

This is the healthiest thing that has happened to direct lending in a long time, because uniformity was a symptom of too much capital chasing the same underwriting and dispersion is what happens when the market starts paying for judgment again. A co-head of Ares' US direct lending business saying this publicly says something about who benefits: the firms with funding advantages, underwriting discipline, and books that survived the last few years intact.

The test will be the next refinancing wave, when sponsors can shop their credits and the lenders that get the first look are the ones with real dispersion working in their favor. The list of who gets that call is the new league table, and LPs should be reading it.