Martin Siegel v. Ares Capital Management Alleges Fees Rose 53% to $773M With Inflated Assets 2021–2025
Martin Siegel has initiated legal action against Ares Capital Management LLC. The lawsuit centers on allegations that Ares Capital Management breached its fiduciary duty under Section 36(b) of the Investment Company Act of 1940 by charging what Siegel contends are excessive advisory fees to Ares Capital Corporation (ARCC), a business development company.
The complaint suggests that from 2021 to 2025, advisory fees paid by ARCC to Ares Capital Management surged from $504 million to $773 million, driven by a fee structure that allegedly allowed for inflated asset valuations and maximized earnings without proper checks and balances. Siegel's filing claims these fees significantly exceeded what should reasonably correspond to the services provided, violating fiduciary obligations under the Act. The complaint seeks both a declaration of breach and financial remedies, including disgorgement of excessive fees and related damages. These allegations remain unproven pending the outcome of judicial proceedings.
Mechanism: Alleged Excessive Fee Structure
The complaint alleges that from 2021 to 2025, Ares Capital Management LLC charged Ares Capital Corporation (ARCC) advisory fees that increased from $504 million to $773 million, purportedly without corresponding increases in the scope or quality of services provided. The Defendant's fee structure, which is contested in the derivative suit, allegedly included a management fee set at 1.5% of ARCC's gross assets alongside an income-based incentive fee of 20% of the net investment income. The plaintiff argues that this structure incentivized the overvaluation of ARCC’s assets, thereby artificially inflating the advisory fees collected. (Compl. ¶83)
The complaint further contends that the Defendant calculated fees partly on accrued payment-in-kind (PIK) interest, which represented a substantial portion of ARCC’s reported net investment income (NII), constituting approximately 34% in 2025. Ares Capital Management LLC is accused of profiting from these accrued PIK incomes without providing a clawback mechanism for amounts that may ultimately prove uncollectible, potentially leading to a substantial fee windfall at ARCC's expense. (Compl. ¶217)
Martin Siegel, the plaintiff, argues that the fee arrangement fostered a conflict of interest, enabling the Defendant to maximize fees by prioritizing asset valuations that may not accurately reflect market conditions. According to the complaint, the lack of a clawback provision for PIK interest created economic incentives for Ares Capital Management LLC to inflate asset values, a practice Siegel asserts is inconsistent with fiduciary duties owed under the Investment Company Act of 1940.
These allegations suggest that by anchoring fees to inflated asset values and accrued PIK interest, the Defendant reaped disproportionately large fees, raising questions about the reasonableness and fairness of the advisory fee structure under federal investment advisory statutes. The absence of mechanisms to adjust for potentially inflated valuations or uncollectible income is a key aspect of the fiduciary breach claims outlined in the complaint. (Compl. ¶92–93)
Overall, the plaintiff seeks to demonstrate that these fee structures, by design, prioritized the Defendant's income over a fair negotiation reflecting the services rendered, ultimately burdening ARCC to the detriment of its shareholders. (Compl. ¶36)
The Money: Advisory Fees and Asset Growth
The complaint filed by Martin Siegel identifies substantial increases in advisory fees paid by Ares Capital Corporation (ARCC) to its investment adviser, Ares Capital Management LLC, as a central issue. According to the filing, these fees rose from $504 million in 2021 to $773 million in 2025, reflecting a 53% increase over the period. This rise in fees closely tracked the purported growth in ARCC's portfolio assets, which expanded from $20.1 billion in 2021 to $31.2 billion by 2025, a 55% increase, further suggesting a direct correlation between asset growth and advisory fees. (Compl. ¶124)
Furthermore, the complaint points out that ARCC reported significant unrealized losses of $412 million for the first quarter of 2026, an increase from $83 million in prior periods. This jump in unrealized losses raises concerns about the accuracy of asset valuations upon which the advisory fees are based, suggesting that the growth in portfolio size and the corresponding rise in fees may not accurately reflect the economic realities of ARCC's performance. (Compl. ¶97)
These disclosures highlight the plaintiff's contention that advisory fees paid by ARCC to Ares Capital Management, which constitute a substantial portion of ARCC's expenses, are disproportionate to the services rendered. Siegel's complaint argues that these fees, significantly outpacing asset performance, could constitute a breach of fiduciary duty under Section 36(b) of the Investment Company Act due to their excessive nature relative to the value provided. (Compl. ¶132)
Parties and Roles
The plaintiff in the case, Martin Siegel, is a stockholder of Ares Capital Corporation (ARCC). He brings the action derivatively on behalf of ARCC against the defendant, Ares Capital Management LLC, which serves as the investment adviser to ARCC. Siegel's complaint focuses on the alleged breaches of fiduciary duty by Ares Capital Management, particularly the charging of advisory fees that are claimed to be excessively disproportionate to the services provided.
Ares Capital Corporation, although not a party to the lawsuit, is the entity on whose behalf Siegel asserts the derivative claims. ARCC is a publicly traded business development company that seeks to invest primarily in U.S. middle-market companies. The complaint names additional non-party entities associated with the Ares group, including Ares Management Corporation, which is the parent company of the Defendant, Ivy Hill Asset Management, L.P., a wholly-owned portfolio company of ARCC, and the Senior Direct Lending Program, a joint venture vehicle used by ARCC. (Compl. ¶27)
These non-party entities are relevant to the allegations as they form part of the broader structure through which investment decisions and financial transactions are funneled, a factor that Siegel argues results in the excessive fees paid by ARCC to Ares Capital Management LLC. The structure and relationships among these entities are critical to understanding the purported conflicts of interest and the mechanisms through which the advisory fees are alleged to have been inflated.
The complex interrelationships within the Ares group allegedly allow Ares Capital Management LLC to exert control over ARCC's portfolio, including the determination of asset valuations and the allocation of investment opportunities. This structural advantage is asserted to contribute to the alleged excessive advisory fees, a central issue raised by Siegel in his derivative complaint under Section 36(b) of the Investment Company Act of 1940. (Compl. ¶52)
Breach of Fiduciary Duty: Legal Claims
The verified derivative complaint filed by Martin Siegel against Ares Capital Management LLC primarily alleges a breach of fiduciary duty under Section 36(b) of the Investment Company Act of 1940. This section imposes a fiduciary duty on investment advisers with respect to the receipt of compensation for services provided to a registered investment company. Siegel's complaint asserts that the advisory fees charged by Ares Capital Management to Ares Capital Corporation were excessively large and violated this fiduciary duty. According to the complaint, these fees did not bear a reasonable relationship to the services rendered and were not the result of arm's-length negotiations. (Compl. ¶35)
Specifically, the complaint argues that the fees were "so disproportionately large" that they could not reasonably relate to the services provided by Ares Capital Management, thus breaching fiduciary obligations. Paragraph 132 of the filing underscores this point, emphasizing that the advisory fees demanded by the defendant were of a nature that they violated the principles of reasonable and fair bargaining as required under Section 36(b). The complaint further iterates that the agreement under which these fees were obtained did not reflect genuine negotiations free of undue influence or self-interest. (Compl. ¶36)
This alleged breach of fiduciary duty forms the cornerstone of Siegel’s claim, with the complaint depicting it as a fundamental failure in maintaining the requisite level of duty expected under the Investment Company Act. The advisory fees, according to the complaint, not only deviated from reasonability benchmarks but also facilitated a conflict of interest whereby asset valuations were allegedly manipulated to maximize those fees. Thus, the complaint highlights these excessive fees as incompatible with fiduciary standards and as violations of statutory duty. (Compl. ¶132)
The complaint requests a declaration that Ares Capital Management breached its fiduciary duties, as well as preliminary and permanent injunctions against further such breaches. Additionally, Siegel seeks damages, including rescissory damages, disgorgement of fees, and other compensatory measures. These remedial claims are framed as necessary to address and rectify the alleged breaches that purportedly allowed the defendant to benefit unfairly from their advisory role without corresponding benefits to ARCC. (Compl. ¶217)
Distinctive Pleading Elements: Valuation and Asset Conflicts
The complaint in Martin Siegel v. Ares Capital Management LLC asserts that Ares Capital Management, in its role as the valuation designee for Ares Capital Corporation (ARCC), exploited valuation methodologies to maximize fee income. According to the complaint, Ares Capital Management controls the valuation of ARCC's Level 3 assets, which are illiquid and thus rely on model-based determinations rather than direct market prices. This control allegedly enabled the defendant to set higher asset values, which directly affected the advisory fees collected, creating a conflict of interest. (Compl. ¶63)
In relation to ARCC's software exposure, the complaint highlights a significant discrepancy between reported figures and third-party estimates. ARCC reported its software industry exposure at 24% as of December 31, 2025, while an analysis by The Wall Street Journal suggested the actual exposure might be nearer to 30%. Such differences in exposure figures could imply that Ares Capital Management understated risks in its portfolio, potentially affecting the assessment of asset values and the related fees. (Compl. ¶59)
Furthermore, the alleged benefits from higher asset valuations extend to both management fees and incentive fees, creating a situation where Ares Capital Management's interests could diverge from those of ARCC's stockholders. The complaint points to this misalignment as a key component of its fiduciary duty claims, arguing that asset valuations were inconsistent with observable market evidence and thus led to inflated fee structures. These allegations form part of the broader claim that Ares Capital Management breached its fiduciary duties under Section 36(b) of the Investment Company Act. (Compl. ¶91–92)
The plaintiff seeks declaratory and injunctive relief, along with damages, arguing for rescission of the investment advisory agreement as the inflated asset valuations were not subject to arm's-length bargaining, contributing to excessive fees detrimental to ARCC and its shareholders. (Compl. ¶39–40)
Relief Sought and Procedural Posture
The plaintiff, Martin Siegel, has initiated a derivative lawsuit on behalf of Ares Capital Corporation (ARCC) against Ares Capital Management LLC, seeking several forms of relief. The complaint alleges breach of fiduciary duty by the defendant under Section 36(b) of the Investment Company Act of 1940. The filing calls for a declaration of this breach, alongside requests for preliminary and permanent injunctions to prevent further violations.
In addition to injunctive relief, Siegel seeks the rescission of the current Investment Advisory Agreement and restitution of advisory fees deemed excessive. The complaint argues for rescissory damages, which would unwind the advisory fees collected, payments for lost returns, and the disgorgement of unwarranted fees and interest accrued from such practices. (Compl. ¶39–40)
The derivative nature of the lawsuit underscores that the relief sought is intended for the benefit of ARCC, not Siegel personally. By framing the suit in this manner, the plaintiff contends that Ares Capital Management LLC's actions have harmed ARCC's financial interests directly. This approach emphasizes the alleged disconnect between the advisory fees charged and the services purportedly provided, which, according to the plaintiff, were inadequately benchmarked against the valuations of ARCC's assets. (Compl. ¶48)
These allegations remain unproven, and no responses have been filed by the defendant in this case as of yet.
The allegations described here are taken from the filing and remain unproven; no responsive pleading is reflected in the source document.
David Brunk is a civil litigation attorney. He can be reached at david@newmanbrunk.com.
From the Complaint Public Court Record
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK MARTIN SIEGEL, derivatively on behalf of ARES CAPITAL CORPORATION, Plaintiff, v. ARES CAPITAL MANAGEMENT LLC, Defendant. No. VERIFIED COMPLAINT Plaintiff Martin Siegel (“Plaintiff”), by his undersigned counsel, brings this action derivatively on behalf of and for the benefit of Ares Capital Corporation (“ARCC” or the “Fund”) against Ares Capital Management LLC (“Defendant”) pursuant to Section 36(b) of the Investment Company Act of 1940 (the “ICA”), 15 U.S.C. § 80(a)-35(b). The following allegations are based on knowledge as to Plaintiff and Plaintiff’s own actions, and on information and belief as to all other matters, based on the investigation of Plaintiff’s counsel, which included, among other things, a review and analysis of documents, including filings with the Securities and Exchange Commission (“SEC”), news reports, and other publicly available materials. Plaintiff believes that a reasonable opportunity for discovery will yield additional substantial evidentiary support for the allegations herein. NATURE OF THE ACTION 1. Defendant is the investment adviser of ARCC and has systematically inflated the value of ARCC assets to extract windfall fees paid by ARCC to Defendant in violation of the ICA. 2. ARCC is a management investment company treated as a business development company (“BDC”) under the ICA and managed by Defendant in return for advisory fees and other
2 fees based on ARCC’s portfolio assets. The costs of both the management fee and incentive fee are ultimately borne by ARCC’s stockholders such as Plaintiff. 3. Section 36(b) of the ICA imposes a fiduciary duty on investment advisers to ensure that the compensation they receive from an investment company is not excessive. Defendant breached that fiduciary duty here by receiving investment advisory fees from ARCC that are so disproportionately large that they bear no relation
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