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Apollo Investment Corp. (AINV)
Barclays Capital Global Financials Conference Call
September 09, 2013 02:45 pm ET
Edward J. Golthorpe – President
Leonard M. Tannenbaum – Chairman and Chief Executive Officer-Fifth Street Finance
Brian H. Oswald – Chief Financial Officer, Secretary and Treasurer-Prospect Capital
Kipp deVeer – President-Ares Management LLC
Previous Statements by AINV
» Apollo Investment Management Discusses Q1 2014 Results - Earnings Call Transcript
» Apollo Investment Corporation Management Discusses Q1 2013 Results (Webcast)
» Apollo Investment Management Discusses Q4 2013 Results - Earnings Call Transcript
» Apollo Investment Management Discusses Q3 2013 Results - Earnings Call Transcript
Now on the panel today we have four of the largest BDCs. We have Ted Golthorpe, President of Apollo Investment Corporation; we have Leonard Tannenbaum, CEO of Fifth Street Finance; Brian Oswald, CFO of Prospect Capital and Kipp deVeer, President of Ares Capital.
So we will start off. What is the long-term market opportunity for BDCs in the middle market, given changing regulatory and competitive environment and how would BDCs capitalize on the opportunity to provide value for the shareholders?
Edward J. Goldthorpe
It’s probably the easiest question of the day. Listen, I think our view is probably very consistent with my peers over here, which is, we think the opportunity for BDCs, is they’re massive opportunity. If you think about the amount of illiquid capital that’s been sucked out of the space, the number is hundreds and hundreds of billions of dollars and the total assets of the BDC space is only $35 billion. So we just think that over the last four, five years, we think a lot of these changes that have occurred post-financial crisis are here to stay. I think there is some new leverage rules that came down for the large banks from the Fed in the last couple of weeks and we are really seeing the impact of that in a positive way in our business.
So I think there is a big, big opportunity for four of our companies to really take advantage of this. We think, if we compare where the BDCs are today to where REITs and MLPs were 10, 15 years ago, we think it pretends a much growing sector. There is not a lot of illiquid capital being raised in the space today, a lot of the illiquid capital being raised today away from the BDCs is looking for 15%, 20%, 25% returns, and I think there’s a big opportunity for all of us to provide capital to middle market companies that just filling the void that other people have left. So I leave it there, I can talk about this for the entire 37 minutes, so I leave it over.
Brian H. Oswald
I think the only thing I want to add and sitting here usually I am on a panel on the larger BDCs, we’re the fifth largest and every single one of them is bigger and but the big ones will win in this scenario. It usually happens in any industry where you are going to have a lot of these IPOs, the IPO calendar BDCs and everybody either at moment it’s one file, I want to take one public because they realized the same thing that Ted just said, which is the opportunity set that’s available for the alternative managers is unbelievable.
And I think Goldman started a private BDC, they stopped it in a smaller size and realized they have to actually develop origination. And that type of hurdles that we all went through, no maybe not Apollo, because they started big, but at least we went through as history, we were really small as there is a lot of hurdles this smaller BDC, the illiquid BDCs, the non-investment grade. And what’s happening now is the good banks like RBC has started pulling back in the space and they are going with the people that they care about and they are staying with them and they are leaving others. I think it’s going to be very difficult for the smaller BDCs to be able to compete in cost of capital and borrowing and so you will see a much bigger sector, but you will see it surrounding about seven to 10 firms.
Leonard M. Tannenbaum
Building on what Brian said, I think the big change over the last three years has been the access to the term debt market and the ability to finance our companies at levels that make sense and also allow us the BDCs that had some issue, one Patriot that we bought was doing their financing the bulk with 365 day paper, which having five year assets and 365 days paper financing, it just wasn’t a good model. Now we have access to the capital markets on the debt side that is which is the vehicle for us, the few other companies going forward.
Edward J. Golthorpe
Yeah, I don’t know if all have answered the same question, but I will give it a shot. I think just to address your point about what’s the constraint, like we said all-in-all. The one key constraint that the BDCs all have obviously is the fact that we can only be leveraged one-to-one and so what that does is it obviously prohibits generally certain types of loans from being made, it’s hard for us to be a really, really active first lien lender with leverage capped at one to one. So the way for the business to continue to institutionalize and really grow is just for more of the traditional lending products to be available to us. So one of the ways you can obviously change that is just by moving the leverage governor around.