It’s been two years, but last week The Carlyle Group broke the business development company initial public offering drought, a streak that lasted longer than most Hollywood marriages.
The Washington DC-based firm took TCG BDC public on 14 June, raising $166.5 million by offering 9 million shares priced at $18.50, coming some 27 months after Goldman Sachs BDC debuted in March 2015.
This is a welcome development for BDCs, as there has been a flurry of new private BDC vehicles formed in that two-year period. Bain Capital entered the space last year with the formation of its private BDC, Bain Capital Specialty Finance. Goldman Sachs and Golub Capital also launched private vehicles, Goldman Sachs Private Middle Market Credit and Golub Capital Investment Corporation. Yet no firms had gone public.
There are signs Carlyle might not be the only firm to take a BDC public this year. TCW Group’s BDC, TCW Direct Lending, signalled in an April regulatory filing it was considering a transaction that would allow the shareholders from its private BDC to receive the same number of shares in a vehicle with the capability to IPO.
“I do think that we’re coming to a point where the prices have been improving from a [net asset value per share] standpoint. You have a number of people who have ramped up their financing activity, and you’ll see people come to market that have a track record,” says Cynthia Krus, a partner at law firm Eversheds Sutherland, which works with BDCs, adding she would not be surprised to see more BDC IPO activity in the future.
Michael Hart, chief executive of TCG BDC, says the firm went on a “fairly extensive roadshow” for the IPO, noting that he encountered “savvy” and “very well educated” institutional investors along the way. The knowledge investors are accumulating is not surprising, as many have been committing capital to the space.
Owl Rock Capital is one firm that provides evidence of this, bringing in $2.89 billion of commitments since it launched in early 2016, according to a US Securities and Exchange Commission regulatory filing. A particularly notable commitment was an August 2016 allocation of $400 million from the New Jersey Division of Investment for directing lending as well as $200 million for co-investments.
Hart adds that BDCs have become more popular with investors in recent years, which he attributes to both investor desire for consistent risk-adjusted yields as well as better asset manager-investor alignment on fee structures. He says fees have come under pressure as credit spreads have compressed.
Additionally, BDCs may be getting additional borrowing capacity in the near future, as the US House of Representatives just passed an overhaul of financial regulation laws that includes a provision to let BDCs double their maximum leverage from a 1:1 debt-to-equity ratio to 2:1.
The US Senate will need to weigh in, and any final bill must be approved by both legislative chambers before President Donald Trump can sign it. Regardless, BDC managers are on their way to notching a policy victory in Washington, an impressive feat given how developments there typically move at glacial pace.
With the possibility of using additional leverage to up their investing firepower and an improving market, 2017 may be the year where BDC IPOs make a comeback.