Ares Capital is acquiring a $150 million portfolio of senior secured loans, mezzanine debt and equity coinvestments from Royal Bank of Canada. Ares paid $250,000 last month for the right to acquire the portfolio but needed to raise the money through selling shares in a newly formed business development corporation (BDC).
Ares priced a $165 million BDC this morning, with the portfolio forming the bedrock for the new vehicle. The share offering was targeted at $450 million. An Ares spokesman declined comment on why the IPO was reduced, but there is an option to increase the fund.
Daniel Smith, managing partner and head of debt investments at RBC Capital Markets said, “From RBC’s perspective, we are receiving a fair price for a good portfolio of generally liquid assets and it helped Ares compete their transaction, so it’s a win-win situation.”
A group of RBC executives who previously originated and managed the portfolio joined Ares this summer, including Michael Arougheti, who is President of the BDC. Arougheti was a managing partner of the principal finance group of RBC. Kipp deVeer and Michael Smith also joined Ares from RBC. According to a Securities and Exchange Commission filing, the three control an entity that has a right of first refusal on the portfolio.
“This is a portfolio primarily of private mezzanine debt and equity coinvestments that they had a meaningful role in originating and building,” Smith said. Included in the portfolio are loans and investments in middle-market companies such as Berkline/BenchCraft, Billing Concepts, Diversified Collection Services, Esselte, HB&G Building Products, Mactec, Mechanical Dynamics & Analysis, Reef Holdings Corp., Shoes For Crews, SouthernCare, United Site Services, Universal Trailer Group and York Label Holdings. There are also preferred shares in two RBC CDOs—Foxe Basin CLO 2003 and Hudson Straits CLO 2004. The names were held on RBC’s balance sheet and not in a CDO, though RBC still has exposure to some of these names in its CDOs.
Smith said RBC is still committed to the mezzanine business. “Given the tighter spreads, the returns offered on these types of assets now are not that attractive, but we will reload this portfolio over time,” he added. Tony Manastersky, managing partner, is now in charge of mezzanine investments at RBC.