BDCs

[Donnie]

Michael George wrote:

BDCs (Business Development Companies)

The overwhelming majority of BDCs operate like a Credit Fund. They loan money directly to Middle Market companies.  These are typically companies with between $5 million and $75 million in EBITDA.  The Dodd-Frank Act has made it more difficult for companies in this size range to easily borrow money.

Large investment firms who typically engage in private transactions have established BDC funds to make these loans.  Firms such as Blackstone, KKR, Ares, Goldman Sachs, and Bain Capital have been large players in this arena.

There are some nice features about these BDC loans which make these an attractive high yield investment.

First, a majority of the loans made in BDCs are Senior Secured Loans.  Most of the better run BDCs have a majority of their loans as Senior Secured – 1st Lien.

Second, most of these loans are Floating Rate Loans.  Thus they are not very sensitive to a rise in interest rates.

 

Public vs. Private

As noted in a post above, there is a Wells Fargo BDC Index that trades as a UBS ETN.  Ticker BDCS. Some of the larger positions in this fund are BDCs from Ares, Apollo, FS Investments (Partner is Blackstone), and Goldman Sachs. Yields on the more stable funds range in the 8 to 10% range.

One of the issues with these publicly traded BDCs is the volatility of the share prices.  The origin for many of these public BDCs is that they started as Private Funds who eventually go public.  For example, FSIC is the public BDC for FS Investments GSO Blackstone is the sub-advisor for FS Investments).  This fund was a private non traded fund first, then went public.

This is an important issue.  The volatility of the Private fund is typically much lower.  For a recent example, FSIC has been down about 17% since February.  However FSIC III (The current Private Fund) has been up about 2%.

In addition, somethings the Private BDC Fund can have a higher yield.  Right now the private Goldman Sachs fund is current yielding over 11%.

If you have the ability and access, then I would highly recommend investing in the Private BDC Funds over the publicly traded funds.

 

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I don't understand any of the benefits of investing in non-traded REITs or BDCs.  The share price volatility is lower because the equity is not being valued by the public market.  Instead the equity is being valued by the company itself, though they may use a third party valuation firm.  Public companies also value assets themselves however.  If you want to put your head in the sand, just buy a public BDC / REIT, and mark it on your own books where the company marks its own net asset value.

Other questions:

• Why is it better to not know what the actual public market value is of the securities you hold?


• Why is it better to have the lower liquidity found in non-traded assets?


• Why is it better to pay a high sales commission to buy into these non-traded securities?

I seriously can't think of one advantage of a non-traded REIT/BDC.

[Michael George]

BDCs (Business Development Companies)

The overwhelming majority of BDCs operate like a Credit Fund. They loan money directly to Middle Market companies.  These are typically companies with between $5 million and $75 million in EBITDA.  The Dodd-Frank Act has made it more difficult for companies in this size range to easily borrow money.

Large investment firms who typically engage in private transactions have established BDC funds to make these loans.  Firms such as Blackstone, KKR, Ares, Goldman Sachs, and Bain Capital have been large players in this arena.

There are some nice features about these BDC loans which make these an attractive high yield investment.

First, a majority of the loans made in BDCs are Senior Secured Loans.  Most of the better run BDCs have a majority of their loans as Senior Secured - 1st Lien.

Second, most of these loans are Floating Rate Loans.  Thus they are not very sensitive to a rise in interest rates.

 

Public vs. Private

As noted in a post above, there is a Wells Fargo BDC Index that trades as a UBS ETN.  Ticker BDCS. Some of the larger positions in this fund are BDCs from Ares, Apollo, FS Investments (Partner is Blackstone), and Goldman Sachs. Yields on the more stable funds range in the 8 to 10% range.

One of the issues with these publicly traded BDCs is the volatility of the share prices.  The origin for many of these public BDCs is that they started as Private Funds who eventually go public.  For example, FSIC is the public BDC for FS Investments GSO Blackstone is the sub-advisor for FS Investments).  This fund was a private non traded fund first, then went public.

This is an important issue.  The volatility of the Private fund is typically much lower.  For a recent example, FSIC has been down about 17% since February.  However FSIC III (The current Private Fund) has been up about 2%.

In addition, somethings the Private BDC Fund can have a higher yield.  Right now the private Goldman Sachs fund is current yielding over 11%.

If you have the ability and access, then I would highly recommend investing in the Private BDC Funds over the publicly traded funds.

 

[Donnie]

Wells Fargo has a BDC index.  There are some ETFs that track the WF index, but the ETFs are fairly small in scale.

The asset class was created in 1980.  There is about $40-50B in the various public BDCs compared to about $1T in REITs, so it is a much smaller asset class.  Most of the funds have only been around for 15-20 years, so probably not enough time to really know how the assets perform on a long term basis.

Generally these funds make loans to small and medium sized businesses (SMB) at an 8-10% interest rate.  The asset class is somewhat interesting in the sense that it is difficult for an investor to get exposure to private SMBs any other way unless the investor is accredited.  The main downside is that the fees can be high and the fund isn't tax efficient.

[The White Coat Investor]

Is there an index fund of BDCs out there like for REITs? What is the long-term return of the asset class, does anyone have any idea?

[Donnie]

Anyone allocate capital to BDCs?  These are basically the same type of funds as REITs, but rather than investing in real estate, BDCs invest in small and medium sized businesses based in the U.S.  Similar to REIT's they pay out all of their income and do not pay taxes.  So effectively, these funds give people exposure to a diversified pool of investments in small businesses in the US that people wouldn't otherwise have access to.

Typically these funds pay ordinary dividends in the 8-12% range (i.e. they pass the taxes to the shareholders), so only really make sense in a retirement account.  The funds are either internally or externally managed, with internally managed funds having lower expenses.