Understand What You Are Buying

If you buy a car, you sign a contract. If you buy land or a home, you sign a contract. If you apply for a credit card you sign a contract. You get the idea. Big purchases require contracts. Most don’t read the fine print in the contract, because they assume it is acceptable lawyer-speak.

What To Read About An Investment

When it comes to investing, I will admit that I don’t read everything about every investment I buy, but there are three things I often will review if I am buying shares in a business, I know nothing about. The first thing I read is the company profile. I use Seeking Alpha (SA), so I can see the profile on the FINANCIALS, OVERVIEW link. For Ares Capital (ARCC), SA has this:

Seeking Alpha – Company Profile Information for ARCC

Ares Capital Corporation is a business development company (BDC) specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. The fund typically invests between $20 million and $200 million and a maximum of $400 million in companies with an EBITDA between $10 million and $250 million. It makes debt investments between $10 million and $100 million The fund invests through revolvers, first lien loans, warrants, unitranche structures, second lien loans, mezzanine debt, private high yield, junior capital, subordinated debt, and non-control preferred and common equity. The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically considers the purchase of stressed and discounted debt positions. The fund prefers to be an agent and/or lead the transactions in which it invests. The fund also seeks board representation in its portfolio companies.

What are the key elements in this profile? 1) ARCC is a BDC. 2) It operates in the financial sector and its industry subclassification is “Asset Management and Custody Banks.” 3) ARCC is diverse in the sectors where it operates: manufacturing, business services, consumer products, healthcare, and so on. It is geographically diverse. 4) It gets involved in the businesses it finances by seeking board representation in its portfolio companies.

Company Investor Web Site

Once I understand the business at a high level, I want to see what the company says about itself. This can be discovered at the company’s web site. ARCC’s web site can be found here: ARCC.

Finding Information at ARCC’s web site

In addition to their home page and related pages, there is often a link to Investor Resources or Investor Relations. ARCC, for example, has this link from their home page: ARCC INVESTORS.

I usually want to see a recent investor presentation, if one exists. This will be a slide show that gives you a high-level look into the business and what makes it tick.

These are three pages from the presentation that captured my attention:

Key Differentiators in the COVID-19 Environment
Robust deep and diverse access to debt financing.
Investing in different sectors is a key component of a good BDC.

Be an informed investor. Take the time to get to know the details about a company before you buy shares. Does the company fit your investment profile? Does it improve your diversification? How big is the company’s moat? What are the risks? Don’t just buy the latest hot tip.

Full Disclosure

Cindie and I own 4,350 shares of ARCC as a long-term investment. As a result, it is in the top ten investments we hold. The other top ten companies are: ABBV, ARCC, MAIN, MPW, O, PFE, T, VLO, and one ETF: VYM. This is not a recommendation for you to buy any of these, but they give insights into what I like.

This payout ratio (99%) could be excessive if ARCC’s business suffers.