Business development companies (BDCs) are, by nature, a strange beast. The equity trades like any other listed corporate but the underlying portfolio is made up of debt. They are structured and regulated like mutual funds, but they charge fees like private equity funds. They are public vehicles that invest in private companies.
Private debt is a gossipy sector so gaining the respect of peers is a hallmark of success. BDCs unequivocally well-regarded by lenders and analysts include Ares Capital Corporation (ARCC), FS Investment Corp.(FSIC), Golub Capital BDC (GBDC), TPG Specialty Lending (TSLX) and Goldman Sachs BDC (GSBD).
At the other end of the spectrum are the managers that have drawn heat from analysts, shareholders and the press. Misdemeanors include raising equity below NAV, taking management companies public to shore up new capital while BDCs were underperforming, charging excessive fees, cutting dividends or some combination of the above.
HARD TO KILL
While these and other BDC managers are trading below book, managers note that it only precludes them from raising new equity. They can still churn existing capital into new deals as they exit maturing facilities. “How the BDCs trade doesn’t really matter, there is no real impact on their ability to pay dividends. If they’re not always raising equity, they could actually spend time optimizing their portfolio rather than chasing their tail,” Brad Marshall, senior portfolio manager on the FSIC BDCs, tells PDI.
STILL ATTRACTIVE, NOT WITHOUT CHALLENGES
With access to permanent capital, no requirement for growth even while trading below book value, the draws of BDCs are obvious. But a successful public launch is a lot harder than it used to be, BDC experts point out.