BXSL - BDCs For An Income Portfolio

2023-11-20 20:57:32 ET

Summary

• There are 48 Business Development Companies, or BDCs, currently in the U.S. market and they collectively manage about $50 billion in capital.
• Many investors are interested in BDCs because they provide a steady stream of income, typically quarterly, but not all have increased their quotation over time.
• In fact, only about 23%, or 11, of dividend-paying BDCs have a positive price trend since inception.
• These 11 BDCs could, in my opinion, attract the attention of an investor interested in both periodic returns and capital growth.

“In the Name of God and Profit”

Francesco di Marco Datini (1335-1410) was a merchant originally from Prato, a historic city located about twelve miles from Florence. He revolutionized the concept of business by creating the first holding company in history, that is, a system of companies that specialized in all kinds of commerce, with branches in Avignon, Florence, Pisa, Genoa, Barcelona, Valencia, and Majorca.

In his business correspondence, there appeared for the first time the @ sign, which the whole world knows and uses today. His extraordinary ability to conduct business with a capitalistic spirit “in the name of God and profit” (as we read in his ledgers) was combined with marked qualities as a believer and a benefactor who chose to leave all his wealth to the poor of his city.

It was a time when international bankers spoke Tuscan, and among the most solid coins was the Fiorino issued by the Florence mint. To leave a good memory of themselves for posterity, Italian bankers financed charitable institutions and commissioned paintings or frescoes by hiring the most illustrious artists of their time: the Scrovegni family called Giotto to Padua, as did the Bardi and Peruzzi lineages later on for the basilica of Santa Croce in Florence, while the Medici turned their city into one of the most important art treasure chests of humanity.

Italian Bankers and BDCs

In parallel with the marvelous works of art created between the end of the Middle Ages and the beginning of the Modern Age, Italian bankers provided finance with a range of instruments that we still use today: the check, the endorsement, the bill of exchange, the overdraft, bonds, insurance, reinsurance, and double-entry bookkeeping.

As far-sighted and creative as they might have been, however, my ancestors of course did not invent everything in finance, leaving it to posterity to complete the landscape with all the other instruments developed to the present day, including a special type of investment called the Business Development Company. The U.S. Congress enabled the creation of such companies in 1980 to fuel job growth and assist emerging U.S. businesses in raising funds.

BDCs combine attributes of publicly traded companies and closed-end investment vehicles, giving investors exposure to private equity- or venture capital-like investments. One of their main characteristics is to be “closely involved in mentoring and developing the companies in their portfolios because it is in a BDC’s best interest to help them become successful.” (Investopedia) Their number currently on the U.S. market is 48.

As far as it is in my expertise, I decided to deal with them in this article, since a couple of BDCs are also in my portfolio. I am analyzing them solely and exclusively by looking for those that have maintained (or even increased) their quotation over time, i.e., whose price changes are now positive compared to their time of launch.

Is It Worth Investing in BDCs?

As with the CEFs, to which I devoted my latest article , for BDCs the answer is also yes. But this is on the condition of making wise choices, selecting the companies that, even through two difficult years like 2022 and 2023, have maintained or even increased their quotation over time. I decided to report the price and not the NAV, due to the lack of charts covering the trend of the underlying assets these BDCs own.

Since all BDCs trade at a premium or a discount to their Net Asset Value, I will indicate the percentage of this difference based on the latest data available for the BDCs mentioned in this article. Discount or premium on NAV has therefore been calculated as the difference between the current market price and the last NAV reported by the investment houses, generally as of September 30, except for PNNT, whose last NAV is as of June 30.

Based on the list published by the site CEFData.com on the page titled “Business Development Company ((BDC)) Universe,” I screened these 48 BDCs, focusing on their price % change since inception using the YCharts platform.

I divided all BDCs into six groups. This is the final result:

As can be seen from this summary table, as many as 37 BDCs, i.e., about 77 percent of those currently on the market, show a price whose quotation has declined since inception. Of course, during this time there have been quarterly distributions that have affected the Total Return of each security, but I have limited myself here to analyzing the sheer change in price, without taking into account either the cashflow generated by each fund or any reinvestment of dividends.

In practice, if at the time of their launch, an investor had purchased any of the 37 BDCs which have decreased in value and merely cashed in the dividends since then, today he would have less invested capital than he had initially. This is because many of these stocks have seen their price drop, in some cases by as much as 70, 80, or 90 percent. (Since I am Italian, tax considerations related to the convenience of any loss-making transactions under U.S. taxation are beyond the scope of my analysis.)

Sure, with Due Diligence

As I said, the answer as to whether it is worth peeping at BDCs is yes, as long as one looks for quality. That is, selecting those companies that have increased the value of their assets over time, in this way creating a dual source of wealth: capital growth and dividends collected.

This is a virtuous circle, however, that affects less than 23 percent of the BDCs currently on the market. The message to be emphasized is that all the 11 companies examined here have over the years (albeit, in some cases, by a small amount) increased the face value of the initial capital, where purchased at launch, as well as, of course, paying dividends. Some of them have done much more, showing price growth reaching double or even triple digits.

As always, the success of each security in our portfolio much depends on when we buy it within each business cycle, and of course, not all of these BDCs perform well if we analyze shorter time intervals, such as three, five, or ten years (e.g. PNNT or RAND, in decline for more than a decade now). But what I wanted to do here is to emphasize the price trend relative to their entire life, and consequently their success –real or virtual– as an investment tool.

Let’s look at the performance of these 11 BDCs in detail.

11 BDCs Worth Peeping At

A curious aspect that emerged during this analysis is that while a good portion of these BDCs can be bought at a discount or at a premium of a few percentage points over NAV, a small number of them quote instead at a huge premium, which, from my point of view, makes their purchase prohibitive. In most cases, however, one can buy at the flea market companies that have proven they can increase their quotation over time, which could make them very attractive.

This is the list:

• Ares Capital ( ARCC )
• Blackstone Secured Lending Fund ( BXSL )
• Crescent Capital BDC, Inc. ( CCAP )
• Capital Southwest ( CSWC )
• Fidus Investment ( FDUS )
• Golub Capital BDC (GBDC)
• Hercules Capital, Inc. ( HTGC )
• Main Street Capital ( MAIN )
• PennantPark Investment Corporation ( PNNT )
• Rand Capital ( RAND )
• Sixth Street Specialty Lending, Inc. ( TSLX )

Ares Capital

Market Cap: $11.21 Bil

Leverage: 50.25%

Discount/Premium: 3.69%

Dividend Yield: 9.77%

Blackstone Secured Lending Fund

Market Cap: $4.89 Bil

Leverage: 50.62%

Discount/Premium: 6.18%

Dividend Yield: 10.87%

Crescent Capital BDC, Inc.

Market Cap: $619.30 Mil

Leverage: 53.21%

Discount/Premium: -15.18%

Dividend Yield: 9.98%

Capital Southwest

Market Cap: $880.50 Mil

Leverage: 51.71%

Discount/Premium: 33.90%

Dividend Yield: 11.41%

Fidus Investment

Market Cap: $550.30 Mil

Leverage: 43.50%

Discount/Premium: 0.31%

Dividend Yield: 14.43%

Golub Capital BDC

Market Cap: $2.53 Bil

Leverage: 55.24%

Discount/Premium: -0.73%

Dividend Yield: 9.93%

Hercules Capital, Inc.

Market Cap: $2.40 Bil

Leverage: 48.94%

Discount/Premium: 45.20%

Dividend Yield: 12.27%

Main Street Capital

Market Cap: $3.42 Bil

Leverage: 43.31%

Discount/Premium: 44.05%

Dividend Yield: 7.11%

PennantPark Investment Corporation

Market Cap: $427.20 Mil

Leverage: 53.37%

Discount/Premium: -15.16%

Dividend Yield: 13.66%

Rand Capital

Market Cap: $33.10 Mil

Leverage: 17.40%

Discount/Premium: -46.11%

Dividend Yield: 7.73%

Sixth Street Specialty Lending, Inc.

Market Cap: $1.84 Bil

Leverage: 51.13%

Discount/Premium: 23.57%

Dividend Yield: 8.77%

Takeaway Plate

A lover of the land, Francesco di Marco Datini built himself a villa farm, complete with livestock, olive trees, and vines. In my own small way, I too have some livestock (to which my wife stands behind) and olive trees, from which we got a modest harvest this year but which provided us with a great quality oil.

From the land, as from markets, we do not always get the fruits we hoped for, but it is our duty to put our best efforts into our choices, trying to do so judiciously. Given a choice between a security whose price has been steadily declining since launch and one with a positive price trend, I believe it is more prudent to lean toward the latter while pocketing or reinvesting its distributions.

As we have seen, today there are only 11 dividend-paying BDCs with a positive price trend since launch out of a total of 48 currently on the market. About 23%, on which the attention of the long-term investor, who aims to enjoy a steady cash flow and capital appreciation, could rightly focus.

In order to invest consciously, it, therefore, appears necessary for me to avoid those BDCs that show a steady declining quotation, even if this decline is partially offset by double-digit distributions, on which the man on the street typically focuses.

Of course, much depends on when you buy security within each business cycle, but knowing that these 11 BDCs have increased their quotation over time is already a comfort in a landscape full of stocks that have burned through capital since launch. Such comfort doesn’t seem little to me.

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