One of the most critical events in the history of finance happened back in 1990. It was the culmination of a transformative two-decade journey that forever changed the way companies are financed. This era also ushered in a golden age of takeovers, fundamentally altering the dynamics of shareholder-company relationships.
I am talking about Michael Milken’s creation of the high-yield bond market, Drexel Burnham Lambert’s meteoric rise, and the firm’s equally spectacular collapse.
It’s crucial to recall that when the government orchestrated the downfall of Milken and Drexel, it wasn’t just a firm that collapsed. Many pioneers of the junk bond and private equity industry, who had been there from the beginning, suddenly found themselves without a job. However, their resilience and determination in the face of adversity are truly inspiring.
Among these newly idle individuals were former traders, analysts, and investment bankers who had worked with Milken. Several of them, including Josh Harris, Leon Black, Marc Rowan, Tony Ressler, and John Kissick, decided that the end of Drexel was the beginning of a massive opportunity for them to build a new firm and a large fortune.
Here's how we can tag along today…
They formed Apollo Management and began investing in the broken junk bonds and fractured loans scattered all over Wall Street when Drexel fell.
The new partners made a fortune for themselves and their investors, and Apollo has grown to be one of the largest alternative asset management firms in the world.
In 1997, Kissick and Ressler split off from Apollo and founded Ares Management. This investment firm focused more on bank loans, high-yield bonds, direct lending, other types of fixed income, and structured equity investments than the previous equity path Apollo was taking.
In 2004, Ares added Michael Arougheti to the firm. Arougheti had been at Merrill Lynch and Royal Bank of Scotland, where he developed deep expertise in distressed and special situation investing.
Today, Michael Arougheti is the CEO and President of Ares Management. While John Kissick went on to pursue other ventures, Tony Ressler still serves as the firm’s executive chairman.
Ares is one of the leading alternative investment firms. While it does have a presence in private equity, it is best known as an income investor. Its credit funds have done extraordinarily well for its investors, and it has several publicly traded vehicles that also provide high income for individual investors.
Investors interested in income or who understand the power of income in a total return-driven strategy should always look at Ares Management’s quarterly 13F filing.
While I do not suggest blindly following anyone, knowing what one of the best income investors of the last 30 years has been buying and selling is useful information.
During the most recent quarter, Ares selectively bought business development companies (BDCs). At the top of the buy list is Oaktree Specialty Lending (OCSL), a BDC managed by Oaktree Capital, a very successful income and credit investor in its own right.
This firm makes loans to middle-market companies in the U.S. that may have limited access to capital markets but have strong business models and growth potential. These companies typically have revenues between $50 million and $500 million.
Oaktree’s strategy favors maintaining a high-quality loan portfolio. The company typically invests in companies with solid fundamentals and low default risk, focusing on capital preservation and current income.
The current yield on Oaktree Specialty Lending shares is a little over 13%.
Ares is also investing in shares of Golub Capital BDC (GBDC), a BDC that invests in middle-market companies, emphasizing those with a private equity sponsor.
Golub’s portfolio is known for its conservative and defensive nature. It focuses on industries that are less vulnerable to economic cycles, such as healthcare, software, and business services. This strategy has historically resulted in a portfolio with lower default rates and stronger returns during periods of economic uncertainty.
The yield on this BDC is 10.5%, but Golub has a history of paying additional special distributions when the portfolio’s cash flow allows. So far this year, the firm has paid an additional 1.9% in special dividends.
Ares also made a small additional purchase of Runway Growth Finance (RWAY) shares, which lends to high-growth industries like technology, life sciences, healthcare information and services, and other fast-growing companies.
While Runway may be seen as a higher-risk BDC, I note that in addition to the 15% yield, Runway paid a $0.05 extra distribution and bought back over 1 million shares of stock in the quarter.
That, along with the fact that one of the world’s leading credit investing firms bought shares, would make me feel more comfortable about adding a small stake in Runway Growth to an alternative income portfolio.
I have been following the buying and selling of Ares and investing in its publicly traded securities for years now.
Mr. Arougheti recently bought a large minority interest in the Baltimore Orioles, which confirms that he’s an extremely intelligent investor with excellent taste in baseball teams.
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