Private Equity for the Masses

Partially a capital-raising arm of the famed Apollo Management group, which is one of the best private-equity investors in the business, Apollo Investment (Nasdaq: AINV  ) is an exceedingly well-run business-development company. Apollo Investment is relatively new to the business-development field, however; it just had its IPO back in 2004. In the private-equity game, investment outlooks generally stretch out three to five years, so Apollo's first batch of investments hasn't quite reached the "seasoned" stage -- unlike, say, those of fellow business-development companies American Capital (NYSE: ACAS  ) and Allied Capital (NYSE: ALD  ) . Nonetheless, the results so far are quite good.

For the second quarter, net investment income for Apollo Investment was $33.8 million, or $0.41 a share, versus $20.7 million, or $0.33 a share. The dividend increased 9% to $0.47 a share, while net asset value (NAV) increased 6% to $16.14.

The company had a strong showing in investing almost $500 million during the quarter. More importantly, the portfolio so far is generating an internal rate of return in excess of 20%, a figure that portends a strong future for investors. And with the SEC recently relaxing the rules for what qualifies as an "eligible portfolio company" for business-development companies, businesses such as Apollo Investment now have a wider range of investment possibilities available to them, as well as the ability to make follow-on investments in certain situations that were not possible before.

While these results were weaker than American Capital's from last week, in terms of dividend and NAV increases, we can cut Apollo some slack, given the relative newness of the portfolio. And keep in mind that one of the advantages of size is the ability to do bigger deals and obtain larger returns -- while American is seeking deals of up to $500 million, Apollo is focusing right now on $20 to $150 million deals as it seeks to build its portfolio. What's more, given the relatively lower valuations -- 1.3 times NAV for Apollo versus 1.5 times NAV for American -- it looks as though the company is priced accordingly. It does make me wonder why investors are paying much higher NAV multiples for Gladstone Capital (Nasdaq: GLAD  ) .

It might be worthwhile to view Apollo and Ares Capital (Nasdaq: ARCC  ) as early-stage business-development companies, and while they are further along than, say, Harris & Harris (Nasdaq: TINY  ) in terms of portfolio maturity, both companies still have a way to go before their results can be fully judged. After all, sustainable premiums to NAV in the 1.5 to 1.7 range usually come from a strong history of outstanding investment results. Whether Apollo will merit that type of premium is open to speculation, but this Fool thinks Apollo is up to the challenge.

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FoolcontributorStephen Ellisdoes not own shares in any companies mentioned. He is ranked225out of more than 12,000 players in Motley Fool CAPS, the Fool's new stock-rating community. The Motley Fool has an ironcladdisclosure policy.


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