Today, debates rage on the marks of private equity and debt investments versus public markets. Ever the topic, public investors rail on private markets investors, indicating they don’t mark their portfolios down appropriately. They also bemoan the fact that…investors *prefer* the soft / no markdowns vs public markets.
Open-ended private debt vehicles often allow for redemption at par / net asset value (NAV) on a quarterly basis (they will typically offer to repurchase 5% of shares outstanding). An equivalent publicly traded debt vehicle is liquid on a daily basis, and can “only” be redeemed at what the publicly traded price is. Often times that varies widely between a discount or premium to NAV.
As an example, Starwood Property Trust – a publicly traded tier 1 property lending vehicle, traded pre-Covid from ~$25 / share to $10 / share in the depths of Covid. As it turns out, NAV for Starwood was largely unchanged pre/post crisis. While much drama happened in the massive market de-stabilization in midst of Covid and the resulting government action to stabilize capital markets, at no point could one buy a share in an equivalent private lending vehicle at such a discount nor would an existing holder see such a markdown on their statements.
Today, Apollo is out in market with a unique private debt vehicle (Apollo Debt Solutions) that primarily invests in private debt backed by large-cap companies (e.g., EBITDA >$100m), a smaller portion in middle-market companies, and a smaller temporary sleeve in liquid debt securities. As mentioned above, it’s private so entry / exit will likely happen at NAV.
Enter Apollo Investment Corporation (AINV). It is a publicly traded vehicle that trades in the ~$12 range / share with a NAV of just under $16 / share. Generally speaking, AINV has been a bit of a junky vehicle with plenty of second lien debt, oil and gas loans, etc. It traded down to ~$5 in Covid (yikes!). However, what is interesting about AINV today is it appears that the vehicle is turning direction to align with the broader simplified corporate strategy at Apollo. Going forward, it essentially is a co-invest vehicle with Athene’s MidCap platform, the middle market sleeve of Apollo’s debt platform. I would think of it as more a MidCap co-invest shell than the more autonomous vehicle it was before.
AINV has steadily reduced second lien debt and what was classified as non-core loans (oil and gas, etc.). MidCap has been a star in the Apollo lending universe and is a heavyweight middle-market lender in corporate loans, life sciences, and is pushing deeper into franchise / trade finance. Furthermore, its primary mission is to feed Athene’s regulated insurance balance sheet. Simply put, it has to originate good quality paper as it is being matched against annuities which in many cases carry guarantees of payment to the annuity holder. All of the assets are regulated by multiple insurance regulators (versus a shadow lending vehicle). But most important, MidCap has had 20bps of *cumulative* losses over 20 years, effectively zero. More recently, MidCap generally pays an 11-12% dividend on invested capital, and that temporarily declined to ~9% through Covid. As such, AINV of tomorrow may not be the AINV of today and yesterday. It may be better positioned as a publicly traded sleeve of MidCap. However, as a public vehicle, it offers a different value proposition, namely one that has the benefit of selling at a material discount to NAV but one that has no certainty on redemption value.
Extra spice doesn’t come without some burn. And as such, AINV is just one tool of many to gain levered private debt exposure, albeit with a much more credible value proposition than the past.
Disclosure: We may own shares in securities mentioned, this is not investment advice. Do your own work.
