apollo investment corp AINV S
April 08, 2004 - 7:21pm EST by
2004 2005
Price: 15.25 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,000 P/FCF
Net Debt (in $M): 0 EBIT 0 0
Borrow Cost: NA

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This is a very low risk short sale recommendation. AINV is a newly launched closed end fund formed to invest in middle market mezzanine and senior loans. It is selling at a 110pct of book value, which consists solely of cash. It could easily trade at 80pct of book value for the following reasons:

1. The fee structure is incredibly rich given the nature of the assets they are seeking to invest in. The management company receives 2 percent of gross assets, plus 20 percent of net realized gains, plus 20 percent of all interest received, subject to a soft hurdle of 7 percent. A soft hurdle means that the fund receives the first 7 percent of yield, then management gets the next 1.75 percent to "catch up" and 20 percent thereafter.

2. Say they make a loan yielding 12pct--treasuries plus 800 basis points. Subtracting their 2 and 20 gives the investor an 8pct yield or treasuries plus 400 basis points. Thus about half the risk premium goes to manager, leaving the investor with a terrible risk/reward ratio.

3. On the above example, the investor is at least getting an 8 percent yield. But he might need to wait for several years before getting an inadequate return relative to risks assumed. In the meanwhile, until they invest fully, he is getting the yield on cash, minus 2percent, or close to zero

4. Apollo is a capable firm, but they have no experience with this type of lending, and have only one full time staffer currently dedicated to this project.


Breaking of syndicate; potentially limitless supply of competing investment vehicles.
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