Only for a long-running Ares Management Corp. private credit fund would the acquisition of a former rival — and its portfolio of more than 200 companies — be considered “additive, rather than transformative.”That’s because the $29 billion Ares Capital Corp. has swallowed up even larger competitors since it was founded over two decades ago, turning it into far and away the largest publicly traded business development company, now almost twice the size of its next biggest rival.

ARCC’s $2.6 billion acquisition of MidCap Financial Investment Corp., known as Apollo Investment Corp. before a name change in 2022, amounts to less than a quarter’s worth of the fund’s originations, Chief Executive Officer Kort Schnabel said on an earnings call Tuesday. It reflects the stark divergence in performance between the two vehicles over the years, given that in the mid-2000s, Apollo Global Management Inc.’s fund was the bigger of the two.

“Obviously, the deal is just not that big, right?”Schnabel said, noting that some of the benefit comes from adding borrowers for the firm to lend to in the future.

While he acknowledged that “consolidation has been an important part of our history,” Schnabel was coy when asked if ARCC has appetite to buy other BDCs that are exploring sales. “We’re in a pretty good position to review and potentially capitalize on any other opportunities that might be out there.”The transaction is the latest example of how acquisitions have helped reshape the $1.8 trillion private credit market, allowing big managers to add billions of dollars of investments more quickly than they could through fundraising and loan origination alone. That scale is taking on new importance as firms deploy their capital to finance the artificial-intelligence buildout that is emerging as one of the industry’s biggest opportunities.

For Ares, it cements ARCC’s position as a leading force in publicly traded BDCs, which have broadly come under intense valuation pressure this year as investors rushed to exit the asset class. S&P Global Ratings lauded the fund’s “sustained strong business position” and “strongest funding and financial flexibility among its peers” in a report Wednesday.

For Apollo, it marks the end of its time offering such a fund, which had been a prized vehicle for its ability to hold perpetual capital and charge attractive fees. Bloomberg Intelligence analysts Paul Gulberg and Samuel Radowitz wrote in a note Tuesday “the transaction would remove an underperforming BDC and simplify exposure for Apollo.”The firm, which also sold a $9 billion publicly traded fund earlier this year to Athene Holding Ltd., will be left only with one stock ticker: APO, the parent company.

“We have taken active steps to support stockholder value across our public vehicles, including through this transaction,” John Zito, co-president of Apollo Asset Management, said in a statement, adding it will continue to invest in the MidCap platform.

At the time of Ares Capital’s initial public offering in 2004, Apollo’s BDC was one of the biggest three in the market. The other two, Schnabel said in his remarks this week, were Allied Capital and American Capital.

ARCC bought Allied in 2010 after it faced scrutiny from short sellers including Greenlight Capital’s David Einhorn. It scooped up American, founded in 1986 by Malon Wilkus, seven years later for $3.4 billion, and touted its ability to do bigger deals as a result.

MidCap, by contrast, is meant to be more additive. Describing its portfolio as “very complementary,” Schnabel noted only 12 of its 229 companies overlap with ARCC’s existing portfolio. This is partly because the Apollo fund had focused on the “core middle market,” with average earnings before interest, taxes, depreciation and amortization around $50 million to $55 million, he said.

That’s been an area of private credit with some challenges of late. Other publicly traded BDCs catering to the middle market have put themselves up for possible sale as they trade below their net asset values. Among them are BlackRock Inc.’s TCP Capital Corp., WhiteHorse Finance Inc. and Investcorp Credit Management BDC Inc. “When the economics of managing a BDC no longer justify the costs, a manager has to determine whether it can deploy the same resources into a private credit fund or a [separately managed account] with greater fee potential and less public scrutiny,” said Dafina Dunmore, a senior director at Fitch Ratings.

MidCap shares had fallen about 30% in the last year before it found a buyer, and 4.6% of its portfolio was on non-accrual status, meaning it did not expect to recover full value on those investments. Ares’ flagship fund, which in contrast has 2.4% of the portfolio on non-accrual status, said the discount at which it is acquiring MidCap will minimize the dollar value of those troubled assets on ARCC’s portfolio.

Its parent Ares helped finance the deal, chipping in $100 million in cash to help ARCC snap up the Apollo assets at a steep discount. Unlike Apollo, which collects fees for the fund only on net assets, Ares stands to gain more because it takes fees on gross assets, which include the value of the assets and the leverage of the fund.

“That makes the portfolio significantly more valuable to Ares,” said Larry Herman, a managing director at Raymond James. He estimates that Ares’ $100 million upfront bid will result in $50 million to $60 million of annual management fees in perpetuity.

He believes the deal could be a possible turning point for the broader industry. “Ares is a disciplined buyer with a history of making acquisitions when valuations are depressed,” Herman said. “Given its track record of identifying attractive entry points, this transaction could be a sign that valuations in the BDC sector are approaching a bottom and may begin to recover.”While absorbing an existing BDC can be a quick way to scale, it can also mean more work and greater need for diligence — even for a fund as large as ARCC. For those in the industry who’ve been unsettled by redemptions and share price declines, Schnabel has some upbeat news.

“With a couple of hundred new names, we definitely are looking to bring on some more headcount,” he said. While the fund has been adding staff gradually over time, there’s “maybe a little bit more of a step function in conjunction with this.”