Reviewing Ares Capital (NASDAQ:ARCC) and Morgan Stanley Direct Lending Fund (NYSE:MSDL)

Ares Capital (NASDAQ:ARCC) and Morgan Stanley Direct Lending Fund (NYSE:MSDL) are both finance companies, but which is the superior business? We will compare the two businesses based on the strength of their earnings, valuation, analyst recommendations, profitability, dividends, institutional ownership and risk.

Institutional and Insider Ownership

27.4% of Ares Capital shares are owned by institutional investors. 0.5% of Ares Capital shares are owned by insiders. Comparatively, 0.2% of Morgan Stanley Direct Lending Fund shares are owned by insiders. Strong institutional ownership is an indication that hedge funds, large money managers and endowments believe a stock will outperform the market over the long term.

Analyst Ratings

This is a summary of current ratings for Ares Capital and Morgan Stanley Direct Lending Fund, as reported by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Ares Capital	0	3	7	0	2.70
Morgan Stanley Direct Lending Fund	0	6	1	0	2.14

Ares Capital presently has a consensus price target of $22.25, indicating a potential upside of 8.43%. Morgan Stanley Direct Lending Fund has a consensus price target of $17.58, indicating a potential upside of 7.38%. Given Ares Capital’s stronger consensus rating and higher probable upside, equities research analysts plainly believe Ares Capital is more favorable than Morgan Stanley Direct Lending Fund.

Volatility and Risk

Ares Capital has a beta of 0.58, meaning that its stock price is 42% less volatile than the S&P 500. Comparatively, Morgan Stanley Direct Lending Fund has a beta of 0.26, meaning that its stock price is 74% less volatile than the S&P 500.

Earnings & Valuation

This table compares Ares Capital and Morgan Stanley Direct Lending Fund”s gross revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Ares Capital	$2.99 billion	4.91	$1.52 billion	$2.00	10.26
Morgan Stanley Direct Lending Fund	$416.08 million	3.42	$215.56 million	$1.65	9.92

Ares Capital has higher revenue and earnings than Morgan Stanley Direct Lending Fund. Morgan Stanley Direct Lending Fund is trading at a lower price-to-earnings ratio than Ares Capital, indicating that it is currently the more affordable of the two stocks.

Profitability

This table compares Ares Capital and Morgan Stanley Direct Lending Fund’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Ares Capital	45.16%	10.08%	4.80%
Morgan Stanley Direct Lending Fund	35.92%	10.21%	4.70%

Dividends

Ares Capital pays an annual dividend of $1.92 per share and has a dividend yield of 9.4%. Morgan Stanley Direct Lending Fund pays an annual dividend of $2.00 per share and has a dividend yield of 12.2%. Ares Capital pays out 96.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Morgan Stanley Direct Lending Fund pays out 121.2% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future.

Summary

Ares Capital beats Morgan Stanley Direct Lending Fund on 14 of the 16 factors compared between the two stocks.

About Ares Capital

Ares Capital Corporation is a business development company 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.

About Morgan Stanley Direct Lending Fund

Morgan Stanley Direct Lending Fund is a business development company. It is a non-diversified, externally managed specialty finance company focused on lending to middle-market companies. Morgan Stanley Direct Lending Fund is based in NEW YORK.