April is the start of spring, when new life anxiously sprouts from winter’s fading footprint. It can be easy to get carried away by such excitement, and in April 2004, a case of spring fever blew its way through a good chunk of the buyout community.
Within a 30-day period five years ago this month, at least seven buyout shops filed to form business development companies (BDCs) in order to raise capital in the public markets. While Apollo Management was the only firm to have priced an offering during the month—on April 5, 2004, Apollo Investment Corp. raised $930 million via an IPO at $15 per share—similar N-2 filings were submitted to the SEC by Kohlberg Kravis Roberts & Co., The Blackstone Group, Evercore Partners, Kelso & Co. and Prospect Street Ventures.
One buyout pro at the time explained to Buyouts what all the hype was about. “Part of the rush has been caused by the capital markets’ search for yield and return. And from private equity’s point of view, BDCs are very liquid and more flexible. Plus there are no artificial constraints and the actual fundraising of a BDC might be done in 90 days versus the six months to a year needed to raise funds privately.”
In the end though, Apollo Investment’s stock went nowhere but down for the first eight months, prompting some of the other firms to call off their plans. Blackstone and Evercore would eventually go public, in August 2006 and June 2007, respectively, selling stock on the New York Stock Exchange. KKR has been stuck in IPO limbo since its July 2007 filing to do the same.
Those that didn’t catch BDC fever were likely spared some residual headaches they’d be feeling today. At press time, Apollo Investment’s shares were trading at $5.20 per share, 65 percent below its initial offering price, while Prospect Street’s BDC Prospect Capital Corp., which finally priced at $16.34 per share more than three years after its initial filing, today is trading at $9.24, about 43 percent short of its initial offering price. Meanwhile, BlackRock Kelso Capital Corp., which was formed in 2005 through a partnership between buyout firm Kelso & Co. and hedge fund BlackRock, and went public in June 2007 at $16.00 per share, was trading at $6.47 at press time, a drop of nearly 60 percent.
To be sure, shares of Blackstone and Evercore haven’t fared much better. But the companies face fewer restrictions on their operations. As confidence in the public market wanes, so too does the value and stability of the BDCs, which are required to maintain a conservative capital structure, including a debt-to-equity ratio of below 1-to-1. Unable to raise additional equity on the public markets and faced with portfolio writedowns that are pressuring their balance sheets, many BDC vehicles today are listing powerlessly as the economic storm continues.