Before You Buy Ares Capital, Here's a Financial Stock I'd Buy First
Companies need access to capital to support their long-term growth efforts. Business development company (BDC) Ares Capital (NYSE: ARES) provides that cash via loans. Real estate investment trust (REIT) W. P. Carey (NYSE: WPC) buys properties from companies in sale/leaseback deals, allowing them to monetize assets for cash.
While BDCs and REITs are very different entities, the basic goals of their customers can be very similar. But for more conservative types, W. P. Carey's approach will probably be a better fit.
As a BDC, the basic business model for Ares Capital is to raise its own Capital at advantageous rates and then lend it out to companies at higher rates. This can be a very profitable business model. The big risk is that a borrower's business doesn't do as well as expected and it ends up defaulting on the loan. There will always be customers that fall into this camp, no matter how careful management is in selecting its partners. The company's non-accrual rate (loans that aren't being paid) was 2.3% at the end of the first quarter -- up year over year but, according to management, below its 15-year average. That suggests that things may be getting tougher for the BDC's customers.
Source Fool.com
