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AINV AT A GLANCE

P/E ► -5.88   EV/EBITDA ► -10.7   ROA ► -6.9% AVG ROE ► -13.9% AVG Debt to Equity ► 0.607 AVG Interest Coverage Ratio ► -7.38 AVG

 

 

 

 

 

 

Apollo Investment is a business development company that invests and manages private equity and capital markets funds. It works mostly with medium-sized companies (those with annual revenues of $50 million to $2 billion) through mezzanine loans, senior secured loans, and equity investments.^[1] Mezzanine loans (subordinated debt) are riskier, but earn a higher rate of return than traditional loans because if a company is unable to pay back its debt, mezzanine debt holders are paid only after other lenders. As a closed end fund, the company has a fixed number of publicly traded shares. The firm uses a value-oriented philosophy, which means it invests in funds that it believes are undervalued and sells those that it believes are overvalued.

For the year through March 2008, Apollo had invested $1.8 billion in 27 new and existing portfolio companies, $400 million more than the year before. Total invested capital since its IPO in 2004 is $5.2 billion. As of March 2008, Apollo's portfolio consisted of 71 companies, where 22% was in senior secured loans, 57% in subordinated debt , 15% in common equity, and 6% in preferred equity.^[2]

One of the biggest risks for the company is that its investments are in private companies, and public information is not readily available. Apollo relies on its own valuation techniques to determine good investments. Other concerns are the credit quality of possible investments, the unpredictability of the mid-sized companies Apollo invests in, and the illiquidity of its investments.

Business Overview

Apollo focuses on value-oriented investments. Its portfolio consists of primarily debt investments in mezzanine, senior secured loans (second lien loans), and some private equity investing from $20 to $250 million of capital in the securities of middle-market firms.

As can be seen from the Statement of Operations data above, investment income increased from 2007 to 2008. However, Apollo realized losses of 235,000 in 2008 compared to gains in in 2007. Apollo also has outstanding borrowings of 1.6 million compared with only 492,000 the year before.

In the last four years, AINV has outperformed both the S&P 500 and the Russell 200 Financials ^[4]

It is registered both as a business development company and regulated investment company (RIC). This helps pass AINV's tax burden on to its shareholders, and requires the company to maintain an asset coverage ratio of at least 200% of assets to liabilities and pay dividends of at least 90% of taxable income and capital gains.

Some risks that AINV incurs are:

• The middle market companies Apollo invests in are more exposed to economic problems than larger companies.

• Apollo relies on its RIC and BDC status to benefit from tax breaks and additional ways of raising capital. If Apollo is unable to maintain this status, it will have a harder time in accessing capital.^[5] Apollo could lose this status if it is unable to provide the required percentage of dividends to its shareholders or starts making investments in other, larger companies.

• Mezzanine loans are more risky, since they are typically not repaid in the event of a loan default. However, mezzanine loans historically offer high returns for this high risk.

^[6]

Trends and Forces

RIC restrictions

As an RIC, Apollo is required to distribute 90% of ordinary income and capital gains. As such, Apollo must find new ways to raise additional capital in order to grow. Because of this, Apollo must continue to borrow from financial institutions, but if it fails to obtain necessary funds, it would limit Apollo's ability to grow.^[7]

Credit quality hurts chances for growth

During times of recession, credit quality risks will rise as firms default on loans. However, Apollo has only seen 2 defaults out of 112 total investments. AINV tends to invest in non-cyclical companies that are larger than those most other BDC's target, which helps hedge some risk.^[8]

Companies AINV invests in are usually not publicly traded

A large percentage of Apollo's portfolio investments are not publicly traded, so the fair value of these companies is not available. Apollo must therefore rely on its valuation techniques, which can provide uncertainty as to the true value of the investments.

Changes in interest rates will affect earnings

Apollo relies heavily on its ability to borrow money in order to make investments in mid-sized companies. As interest rates rise, the cost of borrowing for investments rises and profit margins will decreases.

Competition

Below is a list of Apollo Investment's main competitors. Some of these companies are BDCs like Apollo, however it also has the advantage of being an RIC as well. Like its competitors, Apollo invests in mid-sized companies from different industries.

American Capital Strategies (ACAS) - invests in mid-sized companies. Provides debt-financing for buyouts, and also provides capital directly to private and public firms.

Gladstone Capital (GLAD) - a public investment firm that invests primarily in debt security in small and medium sized companies.

Allied Capital (ALD) - a private equity firm and BDC that provides equity and debt financing with Senior debt loans and subordinated debt.

Ares Capital (ARCC) - a BDC that specializes in acquisitions, recapitalizations, and leveraged buyouts. It typically invests between $10 and $50 million in companies with an Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of between $5 and $50 million.

References

1. ↑ AINV Annual Report 2007
2. ↑ AINV Annual Report 2007
3. ↑ AINV Annual Report 2007
4. ↑ AINV Annual Report 2007
5. ↑ AINV Annual Report 2007
6. ↑ Apollo Investment Corp Website
7. ↑ AINV Letter to Shareholders
8. ↑ AINV Annual Report 2007