Friday Letter: Apollo, god of BDCs

The summer of 2004 saw a plethora of US private equity firms rushing to create “business development companies” – publicly traded vehicles that place debt and equity with private companies.  

Most were forced to abandon their public ambitions due to lacklustre investor interest. But New York private equity giant Apollo Management made it to a $930 million IPO, and now – eat your hearts out – Apollo’s BDC is trading way up.

After debuting at a price near $13 per share in April 2004, Apollo Investment Company is now hovering near $19.50 per share, giving the company a market capitalisation of $1.2 billion – a 30 percent gain in one year.

Apollo’s success may fuel investor interest in these types of security and open the door for other buyout firms to tap the public markets. Already, Apollo Investment (ticker: AINV) is on track to pay an annual dividend to shareholders of roughly $1.40 per share, representing a 7 percent yield. Not bad. BDCs are required by law to pay out the bulk of their earnings to shareholders.

The two largest BDCs – long-standing Allied Capital Corporation and American Capital Strategies – are both currently trading near record highs after impressive price run-ups over the spring, with respective market caps of $3.9 billion and $3.8 billion. This strong performance comes despite relentless pressure from short-selling hedge funds.

There have been other, lower-profile success stories of groups that, like their larger peers, are also benefiting from the buoyancy that makes private debt and equity markets such pleasant places to be at present. New York-based Ares Capital, an affiliate of a buyout firm of the same name, has seen its BDC shares increase to $18 per share from an IPO near $15 per share last November.

Also of note has been the rise of little MVC Capital, a $200 million market cap BDC that used to be called MeVC and focus on venture investing. MeVC was taken over by a group led by former KKR partner Michael Tokarz in 2003 and turned away from technology equity and toward old-economy debt and equity placements. It’s not too soon to say that Tokarz’s play has been impressive. In 2003, MVC was trading at $8 per share and sinking fast. It recently cracked $11 per share after the company announced a debut quarterly dividend of 12 cents per share.

Apollo has proven that success can come as quickly on a much larger scale. You can be sure that other private equity firms, many of them eager to further capitalise on their valuable brands, are monitoring developments in BDC land with great interest. Watch this space for “Attack of the BDCs: Part II”.

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