Ares and Apollo embrace new private-credit alchemy
BREAKINGVIEWS-Ares and Apollo embrace new private-credit alchemy The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jonathan Guilford
NEW YORK, Oct 27 (Reuters Breakingviews) - Private-credit’s public reckoning is moving into a magical phase. Ares Capital ARCC.O, a listed loan outfit backed by Ares Management ARES.N agreed to buy peer MidCap Financial Investment MFIC.O, which is operated by Apollo Global Management APO.N. The $2.6 billion deal, including debt, takes advantage of a yawning chasm in their valuations that should create a nice chunk of value. It would give a public seal of approval to the sort of wizardry that often raises eyebrows in private markets.
Business development companies, or BDCs, are shells with tax advantages that invest in non-bank loans. MidCap, also known as MFIC, is fed by an eponymous unit within Apollo, the investment giant led by Marc Rowan, that finds borrowers among pipsqueak companies owned by rival buyout barons. It has become a worrisome spot in the industry.
This vast private credit complex lent out large sums during a boom in technology deals. Software developers account for 12% of MFIC’s portfolio. The dangers rattled investors, who started spotting related cracks elsewhere. Many BDC shares crashed significantly below their stated net asset values, or NAV.
MFIC sold off particularly severely. Before the acquisition plan was unveiled on Tuesday, the firm traded at about 60% of its last-stated NAV per share, below the industry 70% average discount, as tracked by Raymond James analysts. Ares Capital, however, is a rare standout. The industry’s largest publicly traded BDC, managing more than $30 billion, it trades pretty close to its NAV.
The arbitrage is obvious. Although the MFIC deal involves some cash, Ares is largely paying with its richly valued shares. The Apollo-run vehicle's equity was worth about $690 million. On Ares Capital’s valuation multiple, it would exceed $1 billion. If investors don’t punish the buyer for some reason, it would add $330 million of value simply by moving some loans around. Ares Capital’s stock price was roughly flat following the news.
These BDCs are tiny relative to their backers. It's nevertheless a sign that public markets may be willing to embrace the same sort of maneuvering that attracts scrutiny in private. Managers buying secondhand fund stakes at a discount sometimes mark them right back up to their stated NAV, in aggressive fashion. The relatively simple trick here may yet lead to more experiments in financial alchemy.
Follow Jonathan Guilford on X and LinkedIn.
CONTEXT NEWS
Ares Capital Corporation, a publicly traded business development company run by Ares Management, on October 27 announced an agreement to acquire peer MidCap Financial Investment, known as MFIC, run by Apollo Global Management.
Under the terms of the transaction, MFIC investors will receive $1.21 per share in cash and $9.67 of Ares Capital stock. Ares will issue stock at a ratio to its reported net asset value per share or its trading price, whichever is higher, up to a cap.
Wells Fargo provided financial advice to Ares Capital while Moelis advised a special committee of MFIC's board.
(Editing by Jeffrey Goldfarb; Production by Maya Nandhini)
((For previous columns by the author, Reuters customers can click on GUILFORD/ Jonathan.Guilford@thomsonreuters.com))