Ares BDC sees ‘better risk-reward’ for mid-market opportunities

The lender continued to write massive cheques in Q1, but the average portfolio company EBITDA, when adjusted for size, is $66m.

Ares Capital Corporation (ARCC) far out-earned its $0.40-a-share dividend in the first quarter, the New York-based business development company reported Tuesday as it emphasised its focus on medium-sized businesses, despite its ability to finance 10-figure transactions.

While the firm continues to participate in larger deals, ARCC chief executive Kipp deVeer stressed its focus on core mid-market companies on the first-quarter earnings call, saying the space provides “better risk-reward” opportunities. “The lower middle market remains quite crowded, in our opinion, with competitors that lack differentiation and a real ability to compete,” he said, according to a transcript of the call.

Co-president Michael Smith echoed that sentiment, pointing to ARCC’s portfolio.

“We have discussed our interest at this stage in the cycle and making investments in larger companies,” Smith said. “However, it is worth making one clarification [on portfolio company EBITDA] so that investors are clear that we are still very much a lender to middle-market companies with quality documentation and covenant packages.”

The average EBITDA for the firm’s portfolio companies is $122 million, he said, but when adjusted for size, the weighted average EBITDA for the businesses in Ares’ book is $66 million.

Part of the firm’s interest in larger companies comes from a secular market evolution, according to deVeer.

“In the sponsor market, we’re seeing a lack of interest in pursuing sort of the sub-scale high-yield deal; a lot of these deals are getting done privately,” he said. “I don’t think we have an expectation that that’s going to reverse anytime soon.”

Among the larger transactions the firm completed in the quarter was a $1.1 billion commitment as a part of a $4.9 billion senior secured credit facility, which was used to support the buyout of Athenahealth by Veritas Capital and Evergreen Coast Capital.

ARCC held $210.3 million of the second-lien senior secured facility and $32.3 million of the first-lien senior secured facility, according to LPC BDC Collateral. The second-lien position is ARCC’s largest holding after the Senior Direct Lending Programme partnership with Varagon Capital Partners and the investment in Ivy Hill Asset Management.

For its per-share earnings, ARCC reported core and GAAP EPS of $0.48 and $0.50 a share, respectively. The firm’s net asset value per share increased from $17.12 as of 31 December to $17.21 as of 31 March.

The firm’s dividend has increased in recent quarters. ARCC paid a $0.38-a-share distribution until the third and fourth quarters of last year, when it pumped that figure up to $0.39 a share, according BDC Collateral. It now stands at $0.40 a share.

The firm holds some $13.96 billion in total assets. The largest sectors in its portfolio are healthcare, business services and financial services. ARCC listed 2.48 percent of its loans on non-accrual at cost and 0.44 percent of loans on non-accrual at fair value, the database showed.