Ares Capital’s Inorganic Strategy to Benefit in Next Fiscal Year

Ares Capital’s portfolio companies

Ares Capital’s (ARCC) portfolio companies have registered stable growth amid a weak fundamental environment, with a preference for equities among fund managers. Its portfolio companies posted year-over-year EBITDA (earnings before interest, tax, depreciation, and amortization) growth of ~7% in the June quarter. Growth is expected to continue in the current quarter as manufacturing growth stabilizes and services expand.

Ares Capital’s Inorganic Strategy to Benefit in Next Fiscal Year

Ares Capital’s credit statistics have remained stable with nonaccrual loans at 1.3% of the total portfolio at amortized costs, compared to 2.6% in the prior year’s quarter. Nonaccrual loans are expected to be below 1.5% in the current quarter on the back of improving credit quality and financial performances of the portfolio companies.

Ares Capital posted a 6.1% year-over-year rise in revenue. Below are the year-over-year revenues for Ares Capital’s peers in investment management:

  • Prospect Capital (PSEC): -13.2%
  • BlackRock Capital Investment (BKCC): 8.7%
  • Blackstone Group (BX): -31.5%
  • KKR (KKR): -38.4%

Together, these companies form 6.3% of the PowerShares Global Listed Private Equity ETF (PSP).

American Capital acquisition

Closed-end funds have faced competition for originations at a better rate due to an availability of funds and various structured options. The sector was due for a consolidation in order to garner decent margins over the long run.

Ares Capital (ARCC) has entered into a definitive agreement to acquire American Capital (ACAS) for $4 billion, including payouts in the form of cash and stocks. The consolidation will allow Ares to expand its offerings as well as target cross-selling of structured offerings.

Ares Capital has suspended its repurchase program due to the acquisition. The company will fund the acquisition with a combination of debt and equity. Since the company is funding a major portion of the acquisition with equity, overall leverage is expected to remain low in the upcoming quarters.