Michael Arougheti, the CEO of Ares Capital, said, despite the fact that Ares has shown there are benefits to going it alone, there also are benefits to consolidation. “Over time, consolidation is necessary to bring more efficiencies and get the sector moving in the right direction again,” he said.
BDCs are scalable businesses, he added. Overhead and public company expenses could be consolidated. “There’s a desire … that over time the lenders to this space would like to consolidate their exposure to the space in the hands of fewer mangers, to make it more efficient and make sure they’re lending to scale borrowers.”
There would be challenges to such a roll-up, considering two of the largest players in the space, Allied Capital and American Capital, have been hit with “going concern” warnings after posting losses. That situation causes a misalignment of interests between shareholders, board members, management and lenders. Likewise, there are change-of-control provisions in debt documents that would be tricky to work through in the event of a merger. Lastly, stock prices, relative to NAV, would be an issue in negotiating for the best value for shareholders in a sale.
Nevertheless, Arougheti said, “Consolidation will happen but we’re still, in my opinion, in the early days.”
David Gladstone, the CEO of Gladstone Capital Corporation, presented a differing point of view. “I hope there isn’t consolidation, he said. He argued that diversity in the sector has helped BDCs to sharpen their business models based on what works for their peers and what doesn’t. “The BDC model has finally gotten some traction,” he said. “I hope that a lot more small ones will grow up around the country,” he said. He added that his firm is not involved in any discussions about consolidation.
The CEOs, which included Arthur Penn, the CEO of PennantPark Investment Corporation, in addition to Arougheti and Gladstone, agreed on one thing: The BDC model is out of favor right now, but it’s still relevant. Arougheti defended the model, saying, “It’s way too early to write the obituary for the sector.” The BDC protects investors from excessive leverage and the systemic risk that got us into this mess to begin with, he said.
Besides, who else is going to lend to smaller entities and borrowers?, he argued.
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