Learn more about Ares Capital Corporation (ARCC), a BDC that trades on the NASDAQ exchange.
Ares Capital History
- 2004 – Ares Capital Corporation files for IPO. Ares Capital Corporation files its N-2 to become a publicly-traded business development company. Ares Management,parent of its external manager, is a small private equity and credit shop that only managed about $5 billion in 2004. The IPO documents call for the company to issue shares at a price of $15 per share, with Ares Capital Corporation receiving $14.55 in capital per share after the payment of a sales load. The external manager agrees to pick up the tab on the remaining $0.225 in underwriting fees per share, which would be reimbursed by ARCC if returns met a hurdle (they did). Management fees are set at 1.5% of assets plus 20% of returns over a hurdle of 8% per year, subject to a catch-up provision.
- 2005 – Off to a fast start. Much like its rival, Apollo Investment, Ares Capital launches to a fast start. Its portfolio, dominated by investments in in health care, containers, and services, is performing well. By the end of 2005, its portfolio has grown to $614 million against just $44 million of liabilities.
- 2006 and 2007 – Leveraging the portfolio. Ares Capital Corporation begins to make use of leverage, and its asset growth takes off. By the end of 2007, Ares Capital’s portfolio has grown to $1.8 billion of assets, up from $1.3 billion at the end of 2006. Like many BDCs during the era, the company leverages its portfolio with credit facilities and an on-balance-sheet CLO. Issuance of stock above net asset value per share helps drive NAV growth, even as capital losses begin to minimally impair NAV during 2007.
- 2008 – ARCC’s capital call. In early 2008, the financial crisis is beginning to cause problems. In April 2008, ARCC engages in a transferable rights offering to issue 24.2 million shares at roughly $11 per share. This is a steep discount to ARCC’s reported net asset value as of March 31, 2008, which was $15.17 per share. An affiliate of the management company supported the offering with an announcement that it would over-subscribe for an investment up to $50 million in the company’s stock. The rights offering goes without a hitch, and Ares Capital raises much-needed capital from its investors and its manager, which purchased more than 1.6 million shares.
- 2009 – Striking a deal with Allied Capital. In August 2009, Ares Capital raises equity capital again, this time through a simple stock offering rather than a rights offering. It sells the stock at 0.83x book value, in what was its second and last sale below net asset value. The proceeds are used to acquire Allied Capital, and, in a separate transaction, to acquire Allied Capital’s joint venture with GE Global Sponsor Finance named Senior Secured Loan Fund. The Senior Secured Loan Fund is acquired for $165 million in cash in October 2009. Ares Capital acquires Allied Capital’s other assets through a merger in which ARCC issues 0.325 shares of stock for each Allied Capital share. In a sign of deep outrage toward Allied Capital and its managers, a later presentation points out that none of Allied’s senior management kept an executive role at Ares Capital after the merger.
- 2010 – Ares completes its merger of Allied Capital. Ares Capital announced it completed the merger with Allied Capital on April 1, 2010. Its filings for the period-ended June 2010 show that the BDC has nearly $4.1 billion in assets. The merger proves to be highly accretive to Ares Capital shareholders, as the company reports that the issuance of common stock added $1.14 to net asset value per share in the first six months of 2010. (ARCC issued stock to acquire Allied in April, following an equity raise above NAV in the first quarter.) The company books an immediate gain on the acquisition of Allied Capital in the amount of $1.24 per share in the second quarter of 2010.
- 2011-2014 – BDCs are on fire. Almost universally, business development companies start recovering from Crisis-era losses and begin to trade above net asset value. Ares Capital, one of the largest in the industry, has already recovered thanks to gains from its Allied Capital deal. Over the next three years, Ares Capital begins selling off equity positions acquired from Allied at gains, bringing down its equity exposure to a “normal” level of about 10% of assets. Add-on stock offerings above NAV help fuel its growth and its net asset value per share. The company raises more than $700 million of equity capital in 2012, $867 million in 2013, and $270 million in 2014. By the end of 2014, assets stand at nearly $9.5 billion on its consolidated balance sheet, which doesn’t include off-balance-sheet investments in its Senior Secured Loan Program in partnership with GE Global Sponsor Finance.
- 2015 — The end of an era. Tired of its identity crisis as a manufacturer of wind turbines, aircraft parts, and buyout financier, GE Finance decides to sell its Antares business. The Antares sponsor finance business’s partnership with Ares Capital comes to an end when, on August 24, GE notified Ares that it terminated its obligation to present opportunities to the joint venture before pursuing the opportunities for itself. Ares Capital loses a key source of financing, leverage, and deal flow, as Ares and GE had previously worked together to originate credits to put into the program.
- 2016 — Ares Capital agrees to acquire American Capital. American Capital Ltd. came under the gun of activist investor Elliot Management, who urged the BDC to consider liquidating or selling out to another BDC in order to close its discount to NAV, which had persisted since the financial crisis. Ares agrees to acquire American Capital in a cash-and-stock transaction that would value American Capital at $17.40 per share. In all, Ares Capital agrees to pay about 90.6% of American Capital’s pro-forma net asset value, adjusted for simultaneous transactions and payments by Ares Management, ARCC’s external manager. (The external manager coughed up $275 million in cash, in addition to fee waivers worth up to $100 million in order to get the deal done.) The combined company will have more than $13 billion in assets, $7 billion in equity capital, and investments in 385 portfolio companies, making Ares Capital Corporation the single-largest publicly-traded business development company. This massive transaction cements Ares Capital Corporation as the acquirer in the BDC industry.