Apollo Investment Corp.: Industry Contender or Frazzled Diversifier?

Apollo Investment Corporation (NASDAQ: AINV) is a relatively diversified BDC -- does that make it a strong competitor?

Jul 30, 2014 at 11:35AM

Apollo Investment Corporation (NASDAQ: AINV) is a somewhat diversified company, meaning that it competes not only with other BDCs, but with banks and other funds that supply financing or invest in "junk loans" and structured products. This is a large and fragmented industry with a lot of players. So, where does AINV fit in? 

AINV has to be better at its various investing activities than competitors in order to have a sustainable advantage, and considering the range of its activities -- and the way they've changed over time -- I'd argue that it doesn't have a clear leg up on the competition.

Let's investigate. 

Middle market financing 
There are a lot of sources of financing to middle market companies, which in AINV's case means companies with $50 million to $2 billion in revenue. The biggest players in the space are banks, which have been reducing their exposure to the market because of capital requirements and regulatory pressure, which leaves the field open to other players.

Other BDCs and private equity funds are direct sources of competition to AINV when it comes to the lending business. For example, Ares Capital Corporation (NASDAQ: ARCC) is one of the biggest, with $8.2 billion in assets as of March 31, 2014, and like AINV, it has increasingly turned its attention to secured debt.

As more BDCs turn toward senior secured loans in light of the somewhat frothy lending environment of late, competition for the best deals will heighten. While collateral is always a good thing, there might be competitive pressures that reduce the level of covenants in these loans and that provide financing to companies that may not be as strong as they appear. 

The lack of visibility into a BDC's lending arrangements makes this difficult to assess, so trust in management is a major requirement for the BDC investor. 

It does look like AINV is cognizant of its past mistakes and is earnestly looking to reduce risk in its portfolio. It also diversified into new business lines after the crisis, including energy. However, I don't see either activity as part of a larger, coherent strategic plan -- the company's moves look reactionary, rather than deliberate. This doesn't signal long-run competitiveness.

Other investment activities
AINV not only provides financing; it also invests in debt, equity, and structured products. This means market changes in these areas could also have a significant effect on AINV's performance and long-term competitiveness. 

The main risk with investing in these assets is that prices could go down or liquidity could dry up. Structured products introduce additional risks due to a lack of visibility into the underlying portfolio.

In all of these areas, AINV competes with other BDCs that share the strategy, and with banks and other funds. Large banks are, unsurprisingly, the biggest players, both in terms of size and market reach. They might have access to information that AINV can't get its hands on, or access to deals that are more advantageous than those AINV participates in. In both cases, AINV could be at a disadvantage. 

What's special about AINV? 
What AINV does have, however, is the support of Apollo Global Management (NYSE: APO), its "parent" private equity fund. Apollo has been around for 24 years and has assets under management of close to $50 billion. In addition to traditional private equity, the firm invests in credit (meaning lending) and real estate.

In other words, AINV has access to expertise and deal flow that could be a source of advantage to the firm and place it on more equal footing relative to its competitors. This could help mitigate some of the potential risks involved in AINV's investing and lending activities. 

The verdict: Diversification is not always a winning bet 
AINV is a somewhat diversified player operating in a market with a lot of other diversified players. Its source of advantage has to come from being better at those activities than its competitors. Those competitors are numerous, and AINV doesn't appear to have a clearly delineated competitive strategy that sets it apart. 

You might look at AINV again and think that flexibility begets advantage, but I tend to disagree. I like companies that know where their talents lie, and while it's always possible to gain expertise in a new undertaking, I don't see a clear direction in AINV's activities. I see diversification for its own sake, and that, to me, is not the root of competitive advantage -- particularly since that diversification was borne of the pressure of the financial crisis.

So, despite the considerable clout of Apollo and its deep resources, it's not clear to me that AINV can outperform over the long run. 

Anna Wroblewska has no position in any stocks mentioned. The Motley Fool recommends Apollo Investment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers