
[Federal Register Volume 77, Number 50 (Wednesday, March 14, 2012)]
[Notices]
[Pages 15145-15148]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-6190]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29977; File No. 812-13847]


Ares Capital Corporation et al.; Notice of Application

March 9, 2012.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
section 12(d)(3) of the Act.

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    Applicants: Ares Capital Corporation (the ``Company''), Ares 
Capital Management LLC (``ACM'') and Ivy Hill Asset Management, L.P. 
(``Ivy Hill'').
SUMMARY:  Summary of Application: Applicants request an order 
(``Order'') to permit the Company to (a) continue to own (directly or 
indirectly) up to 100% of the outstanding equity interests of Ivy Hill 
and (b) make additional investments in Ivy Hill, in each case, 
following such time as Ivy Hill is required to become a registered 
investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act'').

DATES: Filing Dates: The application was filed on November 16, 2010, 
and amended on June 27, 2011, December 29, 2011, March 7, 2012, and 
March 9, 2012.
    Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on March 29, 2012, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC, 20549-1090. Applicants, 
Ares Capital Corporation, Ares Capital Management LLC and Ivy Hill 
Asset Management, L.P., 245 Park Avenue, 44th Floor, New York, NY 
10167.

FOR FURTHER INFORMATION CONTACT: Laura L. Solomon, Senior Counsel, at 
(202) 551-6915, or Daniele Marchesani, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. The Company, a Maryland corporation, is an externally managed, 
non-diversified, closed-end management investment company that has 
elected to be regulated as a business development company (``BDC'') 
under the Act.\1\ Shares of the Company's common stock are traded on 
The NASDAQ Global Select market.
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    \1\ Section 2(a)(48) defines a BDC to be any closed-end 
investment company that operates for the purpose of making 
investments in securities described in sections 55(a)(1) through 
55(a)(3) of the Act, makes available significant managerial 
assistance with respect to the issuers of such securities, and has 
elected to be subject to the provisions of sections 55 through 65 of 
the Act.
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    2. The Company's business and affairs are managed under the 
direction of a nine member board of directors (``Board''), of whom five 
are not considered interested persons of the Company within the meaning 
of section 2(a)(19) of the Act (the ``Independent Directors''). The 
Board has delegated daily management and investment authority to ACM 
pursuant to an investment advisory and management agreement between ACM 
and the

[[Page 15146]]

Company. ACM, a Delaware limited liability company, is an investment 
adviser registered under the Advisers Act.
    3. The Company's investment objective is to generate both current 
income and capital appreciation through debt and equity investments. 
The Company invests primarily in U.S. middle market companies, where it 
believes the supply of primary capital is limited and investment 
opportunities are most attractive. The Company invests primarily in 
first and second lien senior loans and mezzanine debt, which in some 
cases includes an equity component like warrants.
    4. Ivy Hill, a Delaware limited partnership, manages the investment 
and, if applicable, reinvestment of the assets of a number of private 
investment funds and also serves as sub-adviser or sub-manager to 
certain other private investment funds, whose investment advisers are 
not ACM or affiliates thereof (collectively, ``Funds'').\2\ Ares 
Operations LLC (the ``Administrator'') provides both the Company and 
Ivy Hill with administrative services. Both ACM and the Administrator 
are wholly-owned direct subsidiaries of Ares Management LLC.
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    \2\ Each of the Funds relies on section 3(c)(7) for an exclusion 
from the definition of investment company under the Act.
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    5. The Company directly or indirectly owns 100% of Ivy Hill's 
voting and equity interests. Ivy Hill Asset Management GP, LLC (``Ivy 
Hill GP'') is the general partner of Ivy Hill and the Company is the 
sole member of Ivy Hill GP.\3\ The Company will only rely on the Order 
with respect to its investment in Ivy Hill.
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    \3\ Ivy Hill GP has no other business other than serving as the 
general partner of Ivy Hill and will not have any other business so 
long as Applicants rely on the Order.
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    6. ACM maintains an investment committee for management of the 
Company, and Ivy Hill maintains two investment committees with 
responsibility for the management of designated Funds. On each of Ivy 
Hill's investment committees there are three members that also sit on 
ACM's investment committee. There is no overlap of employees between 
ACM and Ivy Hill.
    7. Applicants state that while both the Company and the Funds share 
the same overall investment objective of investing in middle-market 
companies, each uses a different strategy to implement this objective. 
Specifically, the Company focuses on structuring, originating and 
leading investments directly with issuers while the Funds generally 
focus on acquiring middle-market investments through secondary market 
purchases where the investment has been structured, originated and led 
by a third party. Applicants further state that in some cases, the 
Company and a Fund may acquire the same instruments from an issuer or 
other third party. The Company and the Funds may also enter into 
transactions such as purchases and sales of assets.\4\ There may also 
be situations in which the Company and one or more Funds might invest 
in different instruments issued by the same issuer, such as where a 
Fund has purchased first lien debt and the Company invests in second 
lien or mezzanine debt. The Administrator's legal and compliance team 
monitors the portfolios and potential investments of both the Company 
and the Funds for potential conflicts of interest. Procedures are, 
where appropriate, implemented to restrict communications between Ivy 
Hill's and ACM's investment professionals so that those investment 
professionals are not conflicted when making decisions regarding such 
investments that are in the best interests of their respective 
clients.\5\
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    \4\ Applicants note that each of the Funds that would 
participate in such transactions has a mechanism for reviewing 
certain affiliate transactions, generally consisting of the approval 
of an individual otherwise unaffiliated with Ivy Hill and the 
Company who is engaged by the Fund for the purpose of reviewing such 
affiliate transactions.
    \5\ While there is no formal agreement regarding the sharing of 
non-public information (``Information Sharing'') between ACM, on the 
one hand, and Ivy Hill, on the other, applicants believe that most 
opportunities for Information Sharing are beneficial to the Company 
and the Funds. The Administrator's legal and compliance department 
monitors Information Sharing and has implemented controls to ensure 
that information is not shared where it would be inappropriate. 
There is no compensation involved in the information sharing 
process.
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    8. In addition to managing the Funds, from time to time, Ivy Hill 
invests in debt and/or equity securities issued by certain of the Funds 
and the Company has also invested, and may in the future invest, in 
securities issued by one or more of the Funds. Furthermore, entities 
managed by affiliates of ACM, including entities managed by Ares 
Management LLC, have invested, and such entities and/or entities 
managed by affiliates of ACM may in the future invest, in securities 
issued by one or more of the Funds.
    9. Ivy Hill currently relies on the exemption set forth in section 
203(b)(3) of the Advisers Act, which provides generally that an 
investment adviser with fewer than 15 clients is not required to 
register with the Commission. However, the Dodd-Frank Wall Street 
Reform and Consumer Protection Act \6\ eliminated this exemption, and 
based on the amount of its committed capital under management, Ivy Hill 
will be required to register with the Commission as an investment 
adviser.
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    \6\ Private Fund Investment Advisers Registration Act of 2010, 
Title IV of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
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    10. Applicants believe it would cause economic harm to the Company 
and, thus, the Company's shareholders, for the Company to prematurely 
be forced to divest its investment in Ivy Hill prior to Ivy Hill 
achieving its maximum potential value, which, absent the relief 
requested, the Company believes that it would be required to do.

Applicants' Legal Analysis

    1. Section 12(d)(3) of the Act makes it unlawful for any registered 
investment company, and any company controlled by a registered 
investment company, to purchase or otherwise acquire any security 
issued by or any other interest in certain securities-related 
businesses, including the business of any person who is an investment 
adviser registered under the Advisers Act, unless (a) such person is a 
corporation all the outstanding securities of which are owned by one or 
more registered investment companies; and (b) such person is primarily 
engaged in the business of underwriting and distributing securities 
issued by other persons, selling securities issued by other persons, 
selling securities to customers, or any one or more of such or related 
activities, and the gross income of such person normally is derived 
principally from such business or related activities. Section 60 of the 
Act states that section 12 applies to a BDC to the same extent as if it 
were a registered closed-end investment company. Applicants state that 
Ivy Hill will not be primarily engaged in the business of underwriting 
and distributing securities issued by other persons.\7\
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    \7\ Rule 12d3-1 under the Act provides certain limited relief 
from the restrictions of section 12(d)(3). Since the Company expects 
that a significant portion of Ivy Hill's gross revenues will be 
derived from ``securities related activities'' as defined in rule 
12d3-1, and since the Company will own no less than 50% of the 
outstanding equity securities of Ivy Hill, the requirements of rule 
12d3-1 would not be satisfied.
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    2. Section 6(c) of the Act provides that the Commission may 
conditionally or unconditionally exempt any person, security or 
transaction from any provision of the Act or any rule thereunder, if 
and to the extent that such exemption is necessary or appropriate in 
the public interest and

[[Page 15147]]

consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    3. Applicants request an order pursuant to section 6(c) of the Act 
granting an exemption from the provisions of section 12(d)(3) of the 
Act to the extent necessary to permit the Company to (a) continue to 
own (directly or indirectly) up to 100% of the outstanding equity 
interests of Ivy Hill and (b) make additional investments in Ivy Hill, 
in each case, following such time as Ivy Hill is required to become an 
investment adviser registered under the Advisers Act.
    4. Applicants state that section 12(d)(3) was intended to safeguard 
investment companies from (a) entrepreneurial risks of securities 
related businesses, and (b) conflicts of interest and reciprocal 
practices between investment companies and securities related 
businesses.
    5. Applicants submit that its investment in Ivy Hill does not raise 
the same type of entrepreneurial risks that may have concerned Congress 
in enacting section 12(d)(3). Applicants note that the ownership 
structure of most securities related businesses has changed since the 
time of enactment of the Act from privately held general partnerships, 
which exposed an investment company to the unlimited liability of a 
general partner, to structures characterized by limited liability. 
Applicants point out that the Company's shareholders are not exposed to 
the risk of unlimited liability associated with an interest in Ivy Hill 
because Ivy Hill GP, through which the Company holds its equity 
investment in Ivy Hill, is structured as a limited liability company. 
Therefore, if Ivy Hill were to experience a total loss of capital, the 
Company would lose only the capital invested in Ivy Hill (and in Ivy 
Hill GP), but would be protected from any additional monetary or legal 
liability.
    6. Applicants also submit that the continued ownership of, and 
making additional investments in, Ivy Hill will not present potential 
conflicts of interest and reciprocal practices. The Company owns 100% 
of the voting and equity interests in Ivy Hill and, if the requested 
relief is granted, will maintain at least a majority ownership of the 
voting and equity interests in Ivy Hill in order to continue to 
exercise oversight for the strategic direction of Ivy Hill, including 
the power to control the policies that affect the Company and to 
protect the Company from potential conflicts of interest and reciprocal 
practices. Ivy Hill, moreover, will not serve as an investment adviser 
to the Company or otherwise be in a position to exercise influence over 
the Company. As a result, Applicants believe that ultimately the 
interests of the two companies are generally aligned and that the 
likelihood of conflicts arising between them is low.\8\
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    \8\ Applicants state that they will adopt and implement policies 
and procedures reasonably designed to ensure compliance with the 
conditions of the Order. Applicants further note that at such time 
as Ivy Hill is required to register as an investment adviser under 
the Advisers Act, it will maintain formal policies and procedures 
related to its operations, including appointing a chief compliance 
officer, which are designed to ensure that management of Ivy Hill is 
conducted in the best interests of the Funds, as well as the Company 
(as the indirect equity owner of Ivy Hill) and the shareholders of 
the Company.
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    7. In certain limited circumstances, Information Sharing and 
certain downstream affiliate transactions may raise the potential for 
conflicts of interests. Applicants acknowledge that section 57(a) makes 
it unlawful for certain persons acting as principal to purchase 
property from, or sell property to, a BDC or any company controlled by 
such BDC, or enter into certain joint transactions with the BDC or a 
company controlled by such BDC. Applicants further acknowledge that the 
sharing of Covered Information (defined in condition 3) by Ivy Hill and 
persons controlled by Ivy Hill (collectively, ``Information 
Providers'') with ACM or persons affiliated with ACM (other than the 
Company and persons controlled by the Company and other than as 
necessary to be provided to ACM and the Administrator to provide 
advisory and administrative services to the Company and Ivy Hill) could 
be deemed by the Commission to be prohibited under section 57(a) or 
rule 17d-1. Applicants agree to comply with condition 3 and are not 
seeking any relief from those provisions in the application.
    8. Principal or side-by-side transactions involving the Company or 
Ivy Hill or any entity controlled by Ivy Hill, on the one hand, and any 
Fund, on the other hand, would not trigger the application of section 
57(a) because the participating Funds are ``downstream'' affiliates of 
the Company and rule 57b-1 would apply. In some transactions, however, 
entities managed by certain persons associated with ACM, who are not 
``downstream'' affiliates of the Company, may be invested in the Fund 
that participates in the transaction. Because such persons would have 
an interest in such transaction, even if an indirect one, ACM or the 
Administrator might face a conflict of interest when evaluating such 
transaction between the Company and the Fund. Accordingly, under 
condition 4, a majority of the Independent Directors who have no 
financial interest in such transaction will approve any transaction 
involving the Company, Ivy Hill or any entity controlled by Ivy Hill 
other than the Funds, on the one hand, and any Fund in which ACM, any 
person affiliated with ACM (other than the Company or any entity 
controlled by the Company), any of their clients, or the Administrator, 
is invested, on the other hand, where such transaction would violate 
section 57(a) but for rule 57b-1.
    9. Applicants submit that their request is necessary and 
appropriate in the public interest and consistent with the protection 
of investors. Applicants assert that to continue its ownership of, and 
ability to make additional investments in, Ivy Hill, its portfolio 
company, does not present the concerns that section 12(d)(3) was 
intended to safeguard against and that the exemption would otherwise be 
consistent with the purposes fairly intended by the policy and 
provisions of the Act. Applicants believe that the Company's ownership 
of and continued investment in Ivy Hill will permit the Company to 
continue to realize the increase in value of Ivy Hill, in which it has 
invested considerable resources. Moreover, if the requested relief is 
not granted, and Ivy Hill is required to become a registered adviser, 
the Company will be forced to dispose of its interests in Ivy Hill, 
thus causing economic harm to the Company and its shareholders by 
preventing the Company from preserving the value of its existing 
investment in Ivy Hill and losing the value of expected continued 
growth and development potential of Ivy Hill and by potentially 
incurring a loss on its investment in Ivy Hill in connection with such 
sale.
    10. For the foregoing reasons, applicants believe that permitting 
the Company to continue to own, and make further investments in, Ivy 
Hill is in the best interests of the Company and its shareholders and 
that the standards set forth in section 6(c) have been met.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. The Company will not dispose of the voting or equity interests 
of Ivy Hill if, as a result, the Company would own, directly or 
indirectly, less than 50 percent of the outstanding voting and equity 
interests of Ivy Hill unless the

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Company disposes of all of its interests in Ivy Hill.
    2. The Board will review at least annually the investment 
management business of the Company and Ivy Hill (including a review of 
transactions between the Company and any company controlled by the 
Company, on the one hand, and Ivy Hill and any company controlled by 
Ivy Hill, on the other hand) in order to determine whether the benefits 
derived by the Company warrant the continuation of the ownership by the 
Company of Ivy Hill and, if appropriate, will approve (by at least a 
majority of the Independent Directors) at least annually, such 
continuation.
    3. Except to the extent permitted pursuant to exemptive relief from 
the Commission, neither Ivy Hill (including members of its investment 
committee with respect to Covered Information (as defined below) 
received in their capacities as such) nor any persons controlled by Ivy 
Hill (``Information Providers'') will directly or indirectly provide 
Covered Information to ACM or any person affiliated with ACM (other 
than the Company and persons controlled by the Company and as necessary 
to be provided to ACM and the Administrator to provide advisory and 
administrative services to the Company and Ivy Hill).
    Covered Information means all information except information that:
    (i) Is generally available to the public;
    (ii) Is of the nature that Information Providers share with 
unaffiliated market participants at no cost and is not proprietary to 
the Information Providers;
    (iii) Information Providers have obtained from unaffiliated third 
parties, including but not limited to general market opinions and 
analyses, analyst reports and diligence reports, and that such third 
parties generally make available to others, including market 
participants in the ordinary course, at no cost; or
    (iv) Information Providers have obtained from, or are providing on 
behalf of, borrowers or potential borrowers or their advisors, and that 
such borrowers or advisors generally make available to unaffiliated 
market participants at no cost upon request.
    4. None of the Company, Ivy Hill or any entity controlled by Ivy 
Hill, will enter into any Covered Transaction, as defined below, unless 
a majority of the Independent Directors who have no financial interest 
in such Covered Transaction has approved it. A ``Covered Transaction'' 
is any transaction involving the Company, Ivy Hill or any entity 
controlled by Ivy Hill other than the Funds, on the one hand, and any 
Fund in which ACM, any person affiliated with ACM (other than the 
Company or any entity controlled by the Company), any of their clients, 
or the Administrator, is invested, on the other hand, where such 
transaction would violate section 57(a) of the Act but for rule 57b-1 
under the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-6190 Filed 3-13-12; 8:45 am]
BILLING CODE 8011-01-P


