Key Takeaways
- • Ares Capital (ARCC.O), a listed BDC backed by Ares Management, agreed to buy peer MidCap Financial Investment (MFIC.O), which is operated by Apollo Global Management, in a $2.6 billion deal including debt.
- • MFIC traded at about 60% of its last-stated net asset value per share before the deal was announced, below the industry average discount of roughly 70% of NAV, according to Raymond James analysts.
- • Ares Capital trades close to its NAV and manages more than $30 billion, making it the industry's largest publicly traded BDC; the deal is largely paid in its richly valued shares.
- • Breakingviews estimates the MFIC equity, worth about $690 million, would exceed $1 billion on Ares Capital's valuation multiple, implying roughly $330 million of value creation if investors do not penalize the buyer.
Summary
Ares Capital agreed to acquire MidCap Financial Investment in a $2.6 billion transaction, including debt, according to Reuters Breakingviews. MidCap, known as MFIC, is a business development company (BDC) fed by an eponymous unit within Apollo Global Management, which lends to smaller companies owned by private equity buyout firms. Breakingviews notes the vehicle has become a worrisome spot in the industry, as its portfolio includes a notable share of software developers, which account for 12% of MFIC's portfolio, amid concerns about the technology-deal lending boom.
The deal is built on a valuation gap. Before the acquisition plan was unveiled on Tuesday, MFIC traded at about 60% of its last-stated NAV per share, below the industry average discount of roughly 70%, as tracked by Raymond James analysts. Ares Capital, the industry's largest publicly traded BDC, trades close to its NAV. Because Ares is paying largely with its richly valued shares, Breakingviews estimates that MFIC's equity, worth about $690 million, would be worth more than $1 billion on Ares Capital's valuation multiple, adding roughly $330 million of value if investors do not penalize the buyer. Ares Capital's stock price was roughly flat following the news.
Breakingviews argues the transaction is a sign that public markets may accept the kind of maneuvering that draws scrutiny in private markets, such as managers buying secondhand fund stakes at a discount and marking them back up to stated NAV. The commentary characterizes the arrangement as a relatively simple trick that may lead to further experiments in financial engineering.
The deal is built on a valuation gap. Before the acquisition plan was unveiled on Tuesday, MFIC traded at about 60% of its last-stated NAV per share, below the industry average discount of roughly 70%, as tracked by Raymond James analysts. Ares Capital, the industry's largest publicly traded BDC, trades close to its NAV. Because Ares is paying largely with its richly valued shares, Breakingviews estimates that MFIC's equity, worth about $690 million, would be worth more than $1 billion on Ares Capital's valuation multiple, adding roughly $330 million of value if investors do not penalize the buyer. Ares Capital's stock price was roughly flat following the news.
Breakingviews argues the transaction is a sign that public markets may accept the kind of maneuvering that draws scrutiny in private markets, such as managers buying secondhand fund stakes at a discount and marking them back up to stated NAV. The commentary characterizes the arrangement as a relatively simple trick that may lead to further experiments in financial engineering.
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