AI Driven Private Credit Demand Will Support Fair Long Term Outlook

Catalysts

About CION Investment

CION Investment Corporation is a business development company focused on primarily first lien direct lending and opportunistic credit investments in middle market companies.

What are the underlying business or industry changes driving this perspective?

• Rising demand for private credit as banks retreat from middle market lending supports sustained deployment at attractive spreads, which may underpin investment income and revenue.
• AI driven expansion of digital infrastructure is affecting performance at holdings such as Longview Power, increasing the potential for equity monetizations that can influence earnings and net asset value.
• Energy transition and distributed power needs are influencing portfolio companies like Palmetto Solar and other power assets, creating opportunities for realizations that can affect realized gains and net margins.
• Maintaining a predominantly first lien, floating rate portfolio while funding with largely fixed or minimally repricing liabilities provides an asset liability profile that can support stable net interest margins even if rates normalize gradually.
• Balance sheet flexibility with unencumbered assets, diversified unsecured funding and moderated net leverage positions the company to participate in a more active M&A and refinancing environment, which can affect originations and earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming CION Investment's revenue will decrease by 14.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 52.6% in 3 years time.
• Analysts expect earnings to reach $80.8 million (and earnings per share of $1.57) by about December 2028, up from $25.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, down from 19.9x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 2.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is increasingly relying on episodic opportunistic transactions, mark to market gains on equity positions such as Longview Power and Palmetto Solar, and fee heavy restructuring events to drive net investment income growth. Any slowdown in M&A, refinancing or equity monetization could materially reduce fee income and unrealized gains, pressuring earnings and net asset value growth.
• Competitive pressures from record private debt fundraising, lower coupon spreads, higher leverage levels and looser credit documentation may continue to erode pricing power on new loans. This could compress asset yields over time and weigh on revenue and net interest margins even if headline portfolio performance remains solid.
• Rising nonaccruals, including new problem credits such as Trademark Global and Aspira, and any further credit deterioration linked to tariffs, shifting supply chains or challenged business models, could lift risk rated assets and reduce interest income. Potential restructurings or write downs would also pressure earnings and net asset value.
• Equity holdings that have recently benefited from strong AI driven and energy transition trends could face cyclical setbacks, delays in growth plans or less favorable exit markets. This would make it harder to realize current valuations and could reverse recent mark to market gains, negatively affecting net asset value and long term return on equity.
• The strategy to maintain relatively high leverage near the targeted net debt to equity range, combined with a largely floating rate asset base and a meaningful proportion of unsecured, fixed cost funding, could expose the company to earnings volatility if base rates decline faster than expected or funding costs rise. This would compress net interest margins and net investment income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $10.67 for CION Investment based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.5, and the most bearish reporting a price target of just $8.5.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $153.6 million, earnings will come to $80.8 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $10.0, the analyst price target of $10.67 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.