A Big Upgrade for Ares Capital

After spending the past six months at a middle-of-the-road three-star rank, Ares Capital (Nasdaq: ARCC  ) has impressed enough top-performing members of our 165,000-strong Motley Fool CAPS community to climb to four stars. A total of 341 members have given their opinion on the financing firm, with many of them offering analysis and commentary explaining the recent optimism.

The business of lending to small companies has been good lately, and Ares Capital is finding more opportunities in the business development market. Many CAPS members were happy to see Ares Capital purchase rival Allied Capital and believe it will not only give it an opportunity to reposition some loans into higher-yielding investments but also improve its competitive and financing position. With Ares now the nation's largest business development company, investors see the larger amount of assets under management after the Allied purchase as an advantage.

Ares reported a big jump in first-quarter earnings helped by improved portfolio performance and higher asset values. Strong performance is evident in sector peers as well. Asset appreciation has also been reported by debt-laden peer American Capital (Nasdaq: ACAS  ) in the first quarter, as it swung to a profit, and Blackstone Group (NYSE: BX  ) , as it reported improving private equity investments and positive trends in most of its asset classes.  

Although Wells Fargo's (NYSE: WFC  ) CEO recently said it's seen a lack of qualified buyers, Ares noted in its conference call a clear pickup in middle-market activity, as it's beefed up its backlog and pipeline. And it recently provided a $53 million loan facility in partnership with General Electric's (NYSE: GE  ) GE Capital, in Ares' first transaction as a partner of the Senior Secured Loan Fund.

Peer Apollo Investment (Nasdaq: AINV  ) has also seen increasing investment opportunities and announced an offering of common stock last month to raise more funds, and smaller private equity firm MCG Capital (Nasdaq: MCGC  ) expects to gather momentum in its origination business over the coming quarters. With the payout of a solid 10% dividend, some CAPS members put Ares Capital in the company of other attractive dividend payers.

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