Ares Capital is buying a $150 million portfolio of first and second lien senior secured loans, mezzanine debt and equity coinvestments from Royal Bank of Canada after raising $165 million through selling shares in a newly formed business development corporation (BDC). The move is significant as more than a dozen rival firms have fallen flat in their attempts to raise BDCs, which enable private-equity firms to tap retail investors. Several managers noted that the portfolio transferagreed on in the summerwas the key to Ares' success as potential investors did not need to worry about a blind-pool investment.
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." An Ares spokesman declined comment and bankers indicated the firm was still in a quiet period.
A group of RBC executives who originated and managed the portfolio joined Ares this summer in a spin-out that formed a New York office. That team includes 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. Ares paid $250,000 last month for the right to acquire 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 average yield of the debt is 11.5%. Importantly, once the fund has transferred the assets, it can immediately use leverage to buy more first and second-lien loans, thereby providing higher returns, a rival manager explained.
The names were held on RBC's balance sheet and not in a CDO. 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.