| Valuation method | Value, $ | Upside, % |
|---|---|---|
| Artificial intelligence (AI) | 40.24 | 102 |
| Intrinsic value (DCF) | 8.62 | -57 |
| Graham-Dodd Method | 6.22 | -69 |
| Graham Formula | 204.14 | 926 |
Ares Capital Corporation (NASDAQ: ARCC) is the largest publicly traded business development company (BDC) in the U.S., specializing in middle-market lending and private equity investments. As a leading provider of flexible financing solutions, ARCC focuses on mezzanine debt, leveraged buyouts, recapitalizations, and growth capital for companies with EBITDA between $10 million and $250 million. The firm targets key sectors including business services, healthcare, consumer products, and technology, deploying investments ranging from $20 million to $400 million. With a geographically diversified approach, ARCC operates from offices in New York, Chicago, and Los Angeles, ensuring broad market coverage. The company’s investment strategy emphasizes first-lien loans, unitranche structures, and selective equity participation, often securing board representation in portfolio companies. Backed by Ares Management’s deep credit expertise, ARCC benefits from strong origination capabilities and a disciplined underwriting process. Its consistent dividend payouts (currently $1.92 per share) and robust net income ($1.52 billion in FY2023) make it a standout in the BDC sector, appealing to income-focused investors.
Ares Capital Corporation (ARCC) presents a compelling investment case as the largest and most established BDC, offering exposure to middle-market credit with a diversified portfolio and strong risk-adjusted returns. The company’s scale, access to Ares Management’s institutional resources, and disciplined underwriting mitigate risks associated with non-accruals (historically low at ~1.5%). ARCC’s dividend yield (~9.5%) is well-covered by net investment income (NII), supported by floating-rate loans that benefit in a higher-for-longer rate environment. However, risks include exposure to economic downturns impacting middle-market borrowers and potential compression in lending spreads if competition intensifies. Regulatory scrutiny of BDCs and leverage constraints (currently at 1.1x debt-to-equity, below the 2.0x limit) could also limit growth. Overall, ARCC’s market leadership, conservative leverage, and alignment with Ares’ credit platform position it as a relatively lower-risk BDC option.
ARCC’s competitive advantage stems from its scale, institutional backing, and hybrid debt-equity investment model. As the largest BDC by market cap (~$15 billion), it benefits from superior deal flow, economies of scale in underwriting, and the ability to lead large transactions (up to $400 million). Its affiliation with Ares Management provides access to proprietary deal sourcing, shared due diligence resources, and cross-selling opportunities across Ares’ $419 billion AUM platform. ARCC’s focus on first-lien loans (76% of portfolio) and unitranche structures enhances recovery rates, while its equity kickers (e.g., warrants) offer upside potential. Competitively, ARCC outperforms smaller BDCs in pricing power and diversification but faces stiff competition from private credit funds and direct lenders like Owl Rock Capital (ORCC). Its conservative leverage (1.1x vs. peer average of 1.3x) limits ROE but reduces risk during downturns. The company’s NAV stability ($18.92 per share as of Q1 2024) and low non-accruals (1.3% of portfolio) underscore underwriting discipline. However, its middle-market focus exposes it to higher default risks vs. broadly syndicated loans, and its fee structure (1.5% management fee + 20% incentive fee) is less investor-friendly than some peers.