This is the third article in a series that highlights current trends in the leading segments in the Financial Services sector as revealed during the RBC Capital Markets’ Financial Institutions Conference. The first two articles covered trends in Asset Management and Banking.
Analyst Jason Arnold moderated the Business Development Panel and provided useful insights from his discussions with senior management and panelists on Day 1 of the conference.
Apollo Investment Corp. (NASDAQ:AINV)
Ares Capital Corporation (NASDAQ:ARCC)
Fifth Street Finance Corp. (NASDAQ:FSC)
Hercules Technology Growth Capital Inc (NYSE:HTGC)
Huge opportunities have arisen because of “a large secular shift out of the banking sector,” creating the possibility of new business at a scale that is unique compared to any other financial sub-sector.
M&A volume has picked up significantly, and the trend is expected to last. “The vortex of opportunities far outweighs the available capital in the space” Apollo Investment Corp. (NASDAQ:AINV). Pricing has come off slightly but remains “relatively wide on a historical basis.”
Though a few new larger players have entered the field, there is now some protection from many players due to banking regulations. In addition hedge funds /CLOs have turned down their exposure in this space to very low levels. Banks continue to grapple with regulatory issues and this is supportive for the existing players in the field. In the mezzanine space, however, there is meaningful competition from dedicated mezzanine funds.
A rising interest rate environment presents profitable opportunities for BDCs, and according to Ares Capital Corporation (NASDAQ:ARCC), “if you look at the history, asset classes tend to outperform in a rising rate environment.” Further opportunities are expected to unfold after bill H.R. 31 that would allow BDCs a leverage cap of 2.0xD/E versus 1.0xD/E.