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Apollo Investment (AINV) |
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WIKI ANALYSIS
Apollo Investment (NASDAQ:AINV) 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. Mezzanine loans (subordinated debt) earn a higher rate of return than traditional loans, but are riskier 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 ended March 31, 2010, Apollo had total invested capital of $6.3 billion in 128 portfolio companies. Apollo's portfolio consisted of 72 portfolio companies invested 26% in senior secured loans, 58% in subordinated debt, 5% in preferred equity and 11% in common equity and warrants at March 31, 2009.[1]
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.
Company 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.
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.[2] 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.
Business Financials
In 2010 (AINV's fiscal year ends March 31 of each year), AINV earned a total of $404 million in total revenues. This was a huge increase from its negative revenues of $441 million in 2009. As a result, this had a positive impact on AINV's net income. Between 2009 and 2010, AINV's net income increased from a net loss of $610 million in 2009 to a net profit of $263 million in 2010.[3]
Trends and Forces
RIC restrictions
As a regulated investment company (RIC), Apollo is required to distribute 90% of ordinary income and capital gains to shareholders. 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.[4] This might inherently limit the future revenue growth of AINV.
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. Despite this, there is still a risk that the recession will negatively impact AINV's investments, and thus their earnings.
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. However, since AINV's investment policy is that of value investing, it means they may be more patient with their investments and think longer term.
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. Furthermore, this may also limit the number of companies AINV is able to invest in, as high interest rates forces it to require a higher rate of return.
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.
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