Cliffwater’s portfolio of publicly-traded business development companies has outperformed the returns of similar liquid credit assets, including high yield bonds and leverage loans, over the last three years, according to a report the firm released on Wednesday.
The Los Angeles-based investment and consulting firm’s actively managed BDC Composite showed an annualised net return of 8.33 percent since its inception in August 2014. That compares with 5.08 percent, 3.67 percent and 4.23 percent returns for Bloomberg Barclays US High Yield Index, the S&P/LSTA US Leveraged Loan Index and Wells Fargo Business Development Company Index, respectively, over the same period.
The net return figures factor in the portfolio’s loss of 1.15 percent since August 2014, which Cliffwater attributes to management fees. That is slightly larger than firm’s targeted annual loss of under 1 percent, which is based on expected “credit losses in the loan collateral held by BDCs”, the report read.
The Cliffwater BDC Composite held positions in ten undisclosed BDCs as of September. The overall leverage level of the portfolio was 0.67x with a price-to-net-asset-value ratio of 1.09 as of that date.
Stephen Nesbitt, chief executive officer at Cliffwater, told Private Debt Investor that the relative liquidity of listed BDCs is a draw for investors. And now that the best managed BDCs are trading at prices 10-20 percent above NAV, investors are attracted to private BDCs with the expectation the companies will go public and provide them an “arbitrage premium”.
The relatively strong yield performance of the Cliffwater BDC portfolio, however, mirrors a slight fall in BDC stock prices after reaching a nearly 52-week high earlier this year. The Cliffwater BDC index, which tracks the sector, shows that US BDCs stock prices have declined by 8 percent from 23 February, when prices hit a one-year peak, to 5 October.