Expect more consolidation among U.S. BDCs

A wave of consolidation could sweep through U.S. small business lenders as the beleaguered industry seeks to take advantage of low valuations to combine forces with rivals or larger, stronger firms in a bid to survive.

Once a dominant player in the business development company (BDC) industry, American Capital Ltd., which recently restructured its debt, may be the next big target for acquisition in the space, analysts say.

Smaller BDCs, such as Kohlberg Capital Corp., MCG Capital Corp. and GSC Investment Corp., among others, could also be on the buying list for bigger players.

“To the extent business development companies remain undervalued, with a lot of them trading [in the] 60% range of the net asset value, it presents an opportunity for a buyer to come in and buy the assets at a substantial discount and enjoy good returns,” says Scot Valentin, an analyst with FBR Capital Markets.

Recently, in the biggest deal to date, Ares Capital Corp. agreed to buy its struggling rival Allied Capital Corp. in an all-stock transaction valued at $648 million.

Other distressed debt firms may also be interested in buying a BDC as they have raised significant amount of money recently, says Greg Mason, an analyst with Stifel Nicolaus. Mason says that while a lot of investors are speculating that American Capital will take the same route as Allied Capital, he cautions that the conditions affecting the companies are different. American Capital, which was removed from the Standard & Poor’s 500 index in February, had breached its covenants and was selling assets at distressed prices to raise cash.

American Capital did not respond to queries seeking comment.

Heavyweight BDC Apollo Investment Corp., which raised $157.5 million in a public offering in August, said it is eyeing acquisitions, although it’s not clear if the firm would buy another BDC.

Last month, New York-based Prospect Capital Corp. said it is evaluating a pipeline of potential additional portfolio and investment opportunities and hopes to seal a deal before the end of the year. The company may even consider making a “hostile offer” to a potential candidate, said COO Grier Eliasek on a call with analysts. —Archana Shankar, a correspondent with Thomson Reuters, and Brenton Cordeiro, a trainee correspondent with Thomson Reuters.

A longer version of this story appeared last week in Buyouts, an affiliate publication of PE Week.