Does Ares Capital Management Have Room To Grow?

Business development companies (BDCs) can be a path to solid returns for investors looking for high-yield dividend opportunities. One of the largest publicly traded companies in the BDC space is Ares Capital Management ARCC, which has a solid 9.02% forward dividend yield. BDCs are different from many other types of investments, so it’s important to understand the risks and rewards before investing.

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Essentially, a business development company is looking for advantageous ways to spend money on other smaller companies that need cash to grow or are in distress. The mix of companies can vary by size, and some may be publicly traded. A business development company’s success relies on balancing risk and return. In this way, BDCs function like private equity but are more accessible to retail investors. 

Some, but not all, BDCs transact on public exchanges. These can be volatile investments; sometimes, the market price may be less than the total net asset value (NAV). BDCs must also distribute 90% of their taxable income to investors yearly and invest 70% of their assets in companies with a market value under $250 million.

Aiming For The Middle

Ares Capital Management targets private middle-market companies in the United States. Middle-market companies generally have revenues above $100 million and below $3 billion. This category is further divided into lower, middle, and upper-middle markets. Ares Capital invests in all three segments and a wide variety of business sectors, including healthcare, technology, and infrastructure. 

Ares has invested nearly $23 billion in over 500 companies. It seeks to generate returns through a variety of credit-focused and equity-focused strategies. These smaller companies rely on firms like Ares, especially when lending becomes more restrictive, as it has been in recent years. 

With companies like Ares, much of the success of your investment is in the hands of the managers who select and structure the deals that Ares generates. That is one of the core risks of investing in BDCs; you trust them to choose companies that will succeed over time.

Private credit offers up to 20% APY. Potential accredited investors are looking to capitalize on this growing asset class.

With Loans, There Is Always Risk

Loan structure is particularly crucial because if something goes wrong, being in the first or second senior secured position means that Ares will receive money ahead of other creditors. Diversifying across business sectors is another safety valve, although a widespread economic downturn would likely affect many of the companies Ares invests in. The company first hit the public market in 2004 and weathered the Great Financial Crisis. It estimates that if another crisis of similar magnitude hits, it will still be able to cover its current regular dividends.

Since 2022, Ares Capital has had a total return of 21.4% and a 14% increase in regular dividends. In the first quarter, its net asset value per share was $19.53, up nearly 6% year over year, and the stock is trading at a premium to the NAV. Analyst consensus on Ares Capital is that it is a buy. However, only 13 analysts currently cover the company, and the estimated price appreciation for the stock is within a narrow range. With a company like this, most of the focus is on the returns it provides rather than any growth in the stock price. Recently, Jim Cramer of CNBC sounded cautious about the company, saying that despite the high yield, he can't recommend it because "he has no idea what's inside."

Private credit is only growing in size, hitting $2.1 trillion last year, most of which was invested in the United States. Business development companies represent a special opportunity for investors who are highly focused on dividend yield. Companies like Ares Capital can thrive as long as the companies they invest in continue to do so. 

Are You Missing Out On Higher Yields?

The current high-interest-rate environment has created an incredible opportunity for income-seeking investors to earn massive yields, but not through dividend stocks… Certain private market real estate investments are giving retail investors the opportunity to capitalize on these high-yield opportunities and Benzinga has identified some of the most attractive options for you to consider. 

For example, the Jeff Bezos-backed investment platform just launched its Private Credit Fund, which provides access to a pool of short-term loans backed by residential real estate with a target 7% to 9% net annual yield paid to investors monthly. The best part? Unlike other private credit funds, this one has a minimum investment of only $100. 

Don't miss out on this opportunity to take advantage of high-yield investments while rates are high. Check out Benzinga's favorite high-yield offerings. 

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