"Investment Thesis: We have to weigh current valuation with historical/expected credit performance. On a valuation basis the stock looks inexpensive trading at an 11.7% earnings yield on our calendar 2012 estimate of $0.83 which is significant discount to the peer average of 10.1%. However, the historical performance of AINV has not been good, and while we believe management has outlined a strategic shift, there is still higher risk given the difficulty to change culture and it would realistically take 12-24 months to make any meaningful shifts in a $2.9 billion portfolio. So while the stock does trade at a discount to peers we believe that discount is warranted given the historical performance and higher risk profile. In addition if AINV were to raise additional capital we could see the stock lower. We continue to have a Hold rating on the shares. Message to AINV management…….Don't Issue Additional Equity– based on the earnings conference call questions and the performance of the stock today, we believe AINV analysts and investors were in agreement that AINV should not raise additional equity (either secondary or rights offering). To put it bluntly, AINV has had its share of issues over the past 3-4 years but we believe that none of those issues can be corrected by being bigger. AINV has not lacked capital, what they have lacked, in our opinion, is a strategic focus that can drive acceptable returns for shareholders, quality underwriting and an appropriate expense structure. We think AINV needs to do more true middle market underwriting and less buying pieces of large syndicated transactions. We believe that they need to leverage the intellectual capital of the larger Apollo platform and find strong risk adjusted returns for shareholders and they need to do that with an expense structure that aligns shareholder and management interests."
"We applaud management for suggesting a management fee concession. In the press release AINV said it intended to “waive the management and incentive fees associated with the new shares”. While we disagree with the issuance of new shares, we are huge fans of any line of thinking that would lower the current management expense and are very encouraged that management is willing to think about ways to lower that expense for shareholders. Our only suggestion is don’t couple the change in management fee to new equity. Instead we would suggest that AINV simply lower their fee agreement. We aren’t suggesting making huge changes, but instead of 2% on assets how about 1.75%, and instead of 20% NOI incentive fee how about 18%. The economic impact of these changes would be very similar to waiving the fees on 10% of additional equity. We appreciate what we think is an attempt to show that Apollo Global Management is trying to support AINV, but we think asking shareholders to step up and provide more capital is not the best way to show that support, even if the fee is waived on the new capital. One last comment for the Board of Directors, while you are making these changes please also consider adding a couple shareholder protections like no incentive fee on PIK income until its collected in cash and have the incentive fee hurdle include permanently impaired assets; neither of these changes will cost the new management team a dime if the credit in the portfolio performs as expected. The Board takes decisive action and outlines a new strategy. In our report following last quarter’s conference call we questioned whether the AINV business model was broken. Investing in liquid bonds could not generate a high enough ROE to shareholders after the 2&20 management fee structure. The Board of directors took decisive action with the release of Patrick Dalton who led the investing team and outlined a strategy of focusing on higher ROE businesses like the proprietary middle market originations. In our view, the focus on new businesses lines was necessary and we are glad to see AINV shift its focus. Execution will be key. After years of focusing on more liquid loans we question whether AINV has the team for sourcing and originating new proprietary deals. When asked on the call, we interpreted management’s comments as agreeing..."