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Zacks Industry Outlook Highlights Ares Capital, Main Street Capital and Hercules Capital
Read MoreHide Full Article
For Immediate Release
Chicago, IL – August 6, 2025 – Today, Zacks Equity Research discusses Ares Capital Corp. (ARCC - Free Report) , Main Street Capital Corp. (MAIN - Free Report) and Hercules Capital, Inc. (HTGC - Free Report) .
The Zacks SBIC & Commercial Finance industry faces challenges as persistent high rates and tariff impacts are expected to curb financing demand, slow investment income growth and hamper refinancing activities. Asset quality remains at risk as prolonged high rates may strain borrowers’ ability to repay.
However, regulatory changes, including relaxed leverage limits under the 2018 SBCAA, offer funding flexibility and support growth for the industry players. Therefore, companies like Ares Capital Corp., Main Street Capital Corp. and Hercules Capital, Inc. are worth keeping an eye on.
About the Industry
The Zacks SBIC & Commercial Finance industry comprises companies that provide finance to small and mid-sized privately held developing firms. These firms are typically underserved by traditional banks and other lenders. Additionally, firms suffering from financial distress are the primary target clients of these lenders.
The industry players provide customized financing solutions, ranging from senior debt instruments to equity capital. This financing is provided for a change of ownership transactions, buyouts, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors, among others. Some of the other products offered by the industry participants are mezzanine loans that typically pay high interest rates and can be converted into equity in the target firm.
3 Themes of the SBIC & Commercial Finance Industry
Relatively High Rates & Lingering Uncertainty Over Tariffs: The Federal Reserve has maintained interest rates at 4.25–4.5%, following a 100-basis-point cut last year. The central bank is adopting a wait-and-see approach, seeking more clarity on how tariffs are affecting both the labor market and broader economic growth. With labor market data from June and July indicating some weakness, the likelihood of a rate cut in September has increased.
However, persistently elevated rates and the negative effects of tariffs on sectors served by the SBIC and Commercial Finance industry may dampen demand for financing solutions. Subdued transaction activity is expected to limit growth in total investment income. Additionally, higher rates are likely to constrain refinancing activity, further weighing on the industry players' financial performance.
Asset Quality: Following the COVID-19 outbreak and a subsequent halt in business activities in 2020, most sectors wherein SBIC & Commercial Finance companies provide finance were hit hard. This raised fears of a deterioration of asset quality for industry players. Nonetheless, support from the administration in the form of stimulus packages and the subsequent reopening of businesses supported economic growth. This, thus, prevented a substantial rise in delinquency rates for the industry players.
However, with prolonged higher interest rates, industry players are likely to witness some weakness in asset quality as the portfolio companies might find it difficult to service debt. Also, heightened geopolitical risk and uncertainty over tariff-related headwinds will put a strain on SBIC & Commercial Finance companies’ asset quality.
Regulatory Changes: In 2018, an amendment to the Investment Company Act of 1940 by the Small Business Credit Availability Act (SBCAA) eased leverage limits for such companies, allowing them to increase their debt-to-equity leverage to 2:1 from 1:1. This helped these companies reduce portfolio risks by investing in higher capital structures without forgoing current returns. Thus, the act provided extra funding flexibility to these companies and will continue offering more growth opportunities.
Zacks Industry Rank Indicates Grim Prospects
The Zacks SBIC & Commercial Finance industry is a 38-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #144, which places it in the bottom 41% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of discouraging earnings outlook for the constituent companies in aggregate. Looking at aggregate earnings estimate revisions, it seems that analysts are gradually losing confidence in this group’s bottom-line growth potential. Over the past year, the industry’s earnings estimates for 2025 have been revised 10% lower.
Before we present a few stocks that are well-positioned to confront market challenges, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Underperforms the Sector and the S&P 500
The Zacks SBIC & Commercial Finance industry has underperformed the S&P 500 composite and its sector over the past year.
The stocks in this industry have collectively gained just 3.9% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 20.8% and 21.8%, respectively.
Industry's Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TB), which is commonly used for valuing loan providers because of large variations in their earnings from one quarter to the next.
The industry currently has a trailing 12-month P/TB of 0.94X. The highest level of 1.07X, the lowest of 0.76X and a median of 0.93X have been recorded by the industry over the past five years. Also, the industry is trading at a significant discount compared with the market at large, as evidenced by the trailing 12-month P/TB for the S&P 500 composite of 12.86X.
As finance stocks typically have a low P/TB ratio, comparing SBIC & commercial loan providers with the S&P 500 may not make sense to many investors. Hence, comparing the group’s P/TB ratio with its broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/TB of 5.4X is also way above the Zacks SBIC & Commercial Finance industry’s ratio.
3 SBIC & Commercial Finance Stocks on the Radar
Ares Capital: This Zacks Rank #3 (Hold) stock is a specialty finance firm that primarily invests in U.S. middle-market companies. Based in Maryland, ARCC provides tailored financing, mainly senior secured debt, with corporate investments ranging from $30-$500 million and power project investments between $10 million and $200 million. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Ares Capital has been witnessing growth in total investment income over the last few years. The company is expected to continue seeing a rise in investment income in the quarters ahead, given the regulatory changes and rising demand for customized financing. Also, its investment commitments to new and existing portfolio companies have been steadily increasing.
As of June 30, 2025, ARCC had debt of $14.1 billion and cash and cash equivalents of $447 million. The company has a revolving credit facility, allowing it to borrow up to $6.8 billion at any time.
ARCC has a market cap of $15.8 billion. Over the past six months, the company’s shares have lost 1.4%. The Zacks Consensus Estimate for 2025 and 2026 earnings has remained unchanged over the past week.
Main Street Capital: This Zacks Rank #3 private equity firm specializes in providing equity capital to lower-middle-market (LMM) companies. Main Street Capital also offers debt capital to middle-market companies. Based in Houston, TX, MAIN invests in LMM companies that generate annual revenues between $10 million and $150 million.
As of March 31, 2025, Main Street Capital had total investments (fair value) of $5.1 billion in more than 176 portfolio companies, which consisted of investments in the LMM portfolio, the middle-market portfolio and the private loan portfolio. As of the same date, MAIN’s net asset value (NAV) was $32.03 per share.
At the end of the March quarter, Main Street Capital had total liquidity of $2.3 billion, which included $1.1 billion in cash and cash equivalents and $1.2 billion of unused capacity under its revolving credit facility. As of March 31, 2025, MAIN had a total debt worth $1.9 billion, consisting of debentures and senior notes.
Main Street Capital has a market cap of $5.7 billion. Over the past six months, MAIN stock has rallied 5%. The Zacks Consensus Estimate for 2025 and 2026 earnings has remained unchanged over the past seven days.
Hercules Capital: Headquartered in Palo Alto, CA, HTGC is a specialty finance company that provides venture capital to technology and life science-related companies. Its investments are generally between $15.0 million and $40.0 million, and it expects these to generate revenues within at least two to four years.
Despite the tough macroeconomic scenario, Hercules Capital is expected to continue witnessing the growing demand for customized financing from private equity firms and venture capitalists. The company maintains a robust balance sheet position. HTGC’s concentrated focus on its credit performance is encouraging. Driven by the rise in the demand for customized financing and a strong deal pipeline, total new commitments are expected to keep increasing.
As of June 30, 2025, it had $553.1 million in liquidity, including $785.6 million in liquidity, including $52.2 million in unrestricted cash and cash equivalents, and $733.4 million in credit facilities. The fair value of Hercules Capital’s total investment portfolio was $4.2 billion as of June 30, 2025. Net asset value was $11.84 per share on the same date.
Hercules Capital has a market cap of $3.4 million. Shares of this Zacks Rank #3 company have lost 7% over the past six months. The Zacks Consensus Estimate for 2025 and 2026 earnings has remained unchanged over the past week.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Ares Capital, Main Street Capital and Hercules Capital
For Immediate Release
Chicago, IL – August 6, 2025 – Today, Zacks Equity Research discusses Ares Capital Corp. (ARCC - Free Report) , Main Street Capital Corp. (MAIN - Free Report) and Hercules Capital, Inc. (HTGC - Free Report) .
Industry: SBIC & Commercial Finance
Link: https://www.zacks.com/commentary/2667502/3-sbic-commercial-finance-stocks-to-watch-amid-industry-headwinds
The Zacks SBIC & Commercial Finance industry faces challenges as persistent high rates and tariff impacts are expected to curb financing demand, slow investment income growth and hamper refinancing activities. Asset quality remains at risk as prolonged high rates may strain borrowers’ ability to repay.
However, regulatory changes, including relaxed leverage limits under the 2018 SBCAA, offer funding flexibility and support growth for the industry players. Therefore, companies like Ares Capital Corp., Main Street Capital Corp. and Hercules Capital, Inc. are worth keeping an eye on.
About the Industry
The Zacks SBIC & Commercial Finance industry comprises companies that provide finance to small and mid-sized privately held developing firms. These firms are typically underserved by traditional banks and other lenders. Additionally, firms suffering from financial distress are the primary target clients of these lenders.
The industry players provide customized financing solutions, ranging from senior debt instruments to equity capital. This financing is provided for a change of ownership transactions, buyouts, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors, among others. Some of the other products offered by the industry participants are mezzanine loans that typically pay high interest rates and can be converted into equity in the target firm.
3 Themes of the SBIC & Commercial Finance Industry
Relatively High Rates & Lingering Uncertainty Over Tariffs: The Federal Reserve has maintained interest rates at 4.25–4.5%, following a 100-basis-point cut last year. The central bank is adopting a wait-and-see approach, seeking more clarity on how tariffs are affecting both the labor market and broader economic growth. With labor market data from June and July indicating some weakness, the likelihood of a rate cut in September has increased.
However, persistently elevated rates and the negative effects of tariffs on sectors served by the SBIC and Commercial Finance industry may dampen demand for financing solutions. Subdued transaction activity is expected to limit growth in total investment income. Additionally, higher rates are likely to constrain refinancing activity, further weighing on the industry players' financial performance.
Asset Quality: Following the COVID-19 outbreak and a subsequent halt in business activities in 2020, most sectors wherein SBIC & Commercial Finance companies provide finance were hit hard. This raised fears of a deterioration of asset quality for industry players. Nonetheless, support from the administration in the form of stimulus packages and the subsequent reopening of businesses supported economic growth. This, thus, prevented a substantial rise in delinquency rates for the industry players.
However, with prolonged higher interest rates, industry players are likely to witness some weakness in asset quality as the portfolio companies might find it difficult to service debt. Also, heightened geopolitical risk and uncertainty over tariff-related headwinds will put a strain on SBIC & Commercial Finance companies’ asset quality.
Regulatory Changes: In 2018, an amendment to the Investment Company Act of 1940 by the Small Business Credit Availability Act (SBCAA) eased leverage limits for such companies, allowing them to increase their debt-to-equity leverage to 2:1 from 1:1. This helped these companies reduce portfolio risks by investing in higher capital structures without forgoing current returns. Thus, the act provided extra funding flexibility to these companies and will continue offering more growth opportunities.
Zacks Industry Rank Indicates Grim Prospects
The Zacks SBIC & Commercial Finance industry is a 38-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #144, which places it in the bottom 41% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of discouraging earnings outlook for the constituent companies in aggregate. Looking at aggregate earnings estimate revisions, it seems that analysts are gradually losing confidence in this group’s bottom-line growth potential. Over the past year, the industry’s earnings estimates for 2025 have been revised 10% lower.
Before we present a few stocks that are well-positioned to confront market challenges, let’s check out the industry’s recent stock market performance and valuation picture.
Industry Underperforms the Sector and the S&P 500
The Zacks SBIC & Commercial Finance industry has underperformed the S&P 500 composite and its sector over the past year.
The stocks in this industry have collectively gained just 3.9% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 20.8% and 21.8%, respectively.
Industry's Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TB), which is commonly used for valuing loan providers because of large variations in their earnings from one quarter to the next.
The industry currently has a trailing 12-month P/TB of 0.94X. The highest level of 1.07X, the lowest of 0.76X and a median of 0.93X have been recorded by the industry over the past five years. Also, the industry is trading at a significant discount compared with the market at large, as evidenced by the trailing 12-month P/TB for the S&P 500 composite of 12.86X.
As finance stocks typically have a low P/TB ratio, comparing SBIC & commercial loan providers with the S&P 500 may not make sense to many investors. Hence, comparing the group’s P/TB ratio with its broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/TB of 5.4X is also way above the Zacks SBIC & Commercial Finance industry’s ratio.
3 SBIC & Commercial Finance Stocks on the Radar
Ares Capital: This Zacks Rank #3 (Hold) stock is a specialty finance firm that primarily invests in U.S. middle-market companies. Based in Maryland, ARCC provides tailored financing, mainly senior secured debt, with corporate investments ranging from $30-$500 million and power project investments between $10 million and $200 million. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Ares Capital has been witnessing growth in total investment income over the last few years. The company is expected to continue seeing a rise in investment income in the quarters ahead, given the regulatory changes and rising demand for customized financing. Also, its investment commitments to new and existing portfolio companies have been steadily increasing.
As of June 30, 2025, ARCC had debt of $14.1 billion and cash and cash equivalents of $447 million. The company has a revolving credit facility, allowing it to borrow up to $6.8 billion at any time.
ARCC has a market cap of $15.8 billion. Over the past six months, the company’s shares have lost 1.4%. The Zacks Consensus Estimate for 2025 and 2026 earnings has remained unchanged over the past week.
Main Street Capital: This Zacks Rank #3 private equity firm specializes in providing equity capital to lower-middle-market (LMM) companies. Main Street Capital also offers debt capital to middle-market companies. Based in Houston, TX, MAIN invests in LMM companies that generate annual revenues between $10 million and $150 million.
As of March 31, 2025, Main Street Capital had total investments (fair value) of $5.1 billion in more than 176 portfolio companies, which consisted of investments in the LMM portfolio, the middle-market portfolio and the private loan portfolio. As of the same date, MAIN’s net asset value (NAV) was $32.03 per share.
At the end of the March quarter, Main Street Capital had total liquidity of $2.3 billion, which included $1.1 billion in cash and cash equivalents and $1.2 billion of unused capacity under its revolving credit facility. As of March 31, 2025, MAIN had a total debt worth $1.9 billion, consisting of debentures and senior notes.
Main Street Capital has a market cap of $5.7 billion. Over the past six months, MAIN stock has rallied 5%. The Zacks Consensus Estimate for 2025 and 2026 earnings has remained unchanged over the past seven days.
Hercules Capital: Headquartered in Palo Alto, CA, HTGC is a specialty finance company that provides venture capital to technology and life science-related companies. Its investments are generally between $15.0 million and $40.0 million, and it expects these to generate revenues within at least two to four years.
Despite the tough macroeconomic scenario, Hercules Capital is expected to continue witnessing the growing demand for customized financing from private equity firms and venture capitalists. The company maintains a robust balance sheet position. HTGC’s concentrated focus on its credit performance is encouraging. Driven by the rise in the demand for customized financing and a strong deal pipeline, total new commitments are expected to keep increasing.
As of June 30, 2025, it had $553.1 million in liquidity, including $785.6 million in liquidity, including $52.2 million in unrestricted cash and cash equivalents, and $733.4 million in credit facilities. The fair value of Hercules Capital’s total investment portfolio was $4.2 billion as of June 30, 2025. Net asset value was $11.84 per share on the same date.
Hercules Capital has a market cap of $3.4 million. Shares of this Zacks Rank #3 company have lost 7% over the past six months. The Zacks Consensus Estimate for 2025 and 2026 earnings has remained unchanged over the past week.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.7% average gain per year. Amazingly, they soared with average gains of +48.4%, +50.2% and +56.7% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.