Above-average dividends get attention.
A business development company, or BDC, is a unique class of company that operates much like a private equity firm but with the same oversight requirements as a publicly traded stock. BDCs hold big appeal among income investors. Profits from loans and other investments are delivered to shareholders via regular and generous dividends but without the constraints of conventional private equity funds. Also, current low interest rates allow them to access capital cheaply at a time when many U.S. businesses are eager for debt or equity investments to turn the corner after the pandemic-related disruptions in 2020. If you’re looking to tap into the BDC trend, here are some to consider.
Apollo Investment Corp. (ticker: AINV)
Apollo Investment is an arm of the massive private equity firm Apollo Global Management that commands more than $430 billion in assets at present. Effectively, AINV originates a lot of the debt that helps finance deals and restructurings taken on by its corporate parent. Via both secured and unsecured debt offerings, this BDC throws off a tremendous yield at present. And while it’s always risky to rely on unsecured debt — that is, a loan without protection in the event of a bankruptcy — it certainly helps that AINV has a direct tie to the senior investors.
Current yield: 10.1%
Bain Capital Specialty Finance (BCSF)
In recent years, alternative asset managers that typically operated in private markets have increasingly branched out into the public arena via BDCs. Bain Capital Specialty Finance is a prime example, launching in late 2016 and entering pubic markets in 2018 to raise roughly $150 million. BCSF has been putting that cash to good use since then, primarily via investments through the investment powerhouse that is its parent, Bain Capital, which has roughly $120 billion in assets under management. This close relationship with a big asset manager allows BCSF to get in on some juicy deals and offer both significant and reliable dividends to shareholders.
Current yield: 10.7%
FS KKR Capital Corp. (FSK)
This is another BDC with roots in the biggest names of Wall Street. For those who know their market history, KKR is a very recognizable acronym for Kohlberg Kravis Roberts — a titan of the investment world that made a name for itself with the massive buyout of RJR Nabisco in the late ’80s. FSK benefits from close proximity to the deal-making investment firm, offering what’s called “mezzanine” financing — a hybrid between debt and equity investments that allows the lender to convert to an equity stake in the event of default. Tactics like this maximize yield for FSK shareholders as it deploys capital.
Current yield: 13.9%
Gladstone Investment Corp. (GAIN)
Gladstone is a smaller name in the BDC world specializing in lower middle market investments. That typically means a firm valued at less than $100 million but large enough that it can’t easily access business financing through conventional means. Firms like GAIN are great examples of how investors step up to fill a niche for the benefit of all parties. These smaller companies need financing to operate and grow, and GAIN shareholders get a juicy dividend as the loan payments roll in. The broader U.S. economy also benefits as small businesses find capital they need to become larger. With a monthly dividend of 7 cents a share, Gladstone offers reliable and steady income to shareholders.
Current yield: 8.1%
Golub Capital BDC (GBDC)
Golub Capital primarily invests in senior debt, where it is at the top of the pecking order, including “unitranche” debt where it is a single lender of both senior and subordinated debt. This gives GBDC the certainty of being first in line but also a slightly higher rate closer to what junior lenders would demand. GBDC is led by David B. Golub, a businessman who previously helped run private equity firms and has a long history of sitting on the boards of both private and public companies. This experience helps identify the kind of smaller businesses that are worthy of investment, and which ones will yield the best returns.
Current yield: 8%
Main Street Capital Corp. (MAIN)
Main Street was formed fairly recently, back in 2007, but has grown to become one of the largest BDCs on Wall Street as measured by both assets and market value. It’s a case study in the power of lower middle market investments, as MAIN focuses on lending and investments in firms with revenues between $10 million and $150 million. Main Street estimates indicate that there are nearly 200,000 of these businesses in the U.S., and that they are typically inefficiently priced and eager for capital. With a strong history of success and decent scale, Main Street is a BDC worth a look in 2021.
Current yield: 7.6%
New Mountain Finance Corp. (NMFC)
New Mountain is a modest-size BDC that is focused on a small group of businesses with high free cash flow generation and barriers to entry — companies it likes to call “defensive growth” investments. There are only about 60 or so companies in the portfolio at present, with a big focus on enterprise software, business and health care services, and technology-enabled health care. Collectively, these areas make up more than half of NMFC’s portfolio — which is great news as the pandemic continues to disrupt other areas of the economy but spur big investments in high-tech business services to empower remote workers and workflows.
Current yield: 10.3%
Oaktree Specialty Lending Corp. (OCSL)
Another BDC with close ties to a bigger asset manager, OCSL is the offshoot of Oaktree Capital Management run by the famed junk bond investor Howard Marks. Unlike some of the other names on this list, OCSL focuses on upper middle market companies with enterprise values of between $100 million and $750 million rather that some of the smaller players out there looking for capital. More than half of its portfolio involves first lien loans, so this prime place in the pecking order combined with a focus on slightly larger companies may make OCSL a bit more resilient than its peers in a downturn — even if its yield is not as impressive as other names on this list.
Current yield: 7.7%
PennantPark Investment Corp. (PNNT)
PennantPark is one of the smaller BDCs, with a market capitalization of less than $400 million at present. That limits the size of its debt and equity investments but doesn’t mean the stock delivers less income potential — as evidenced by the generous yield. PNNT typically invests in building and real estate projects, which include hotels, child care and education facilities, as well as consumer and industrial products. Its current portfolio includes an insurance broker, a primary care medical clinic operator and marketing firms.
Current yield: 9.1%
Nine business development companies to buy for growth:
— Apollo Investment Corp. (AINV)
— Bain Capital Specialty Finance (BCSF)
— FS KKR Capital Corp. (FSK)
— Gladstone Investment Corp. (GAIN)
— Golub Capital BDC (GBDC)
— Main Street Capital Corp. (MAIN)
— New Mountain Finance Corp. (NMFC)
— Oaktree Specialty Lending Corp. (OCSL)
— PennantPark Investment Corp. (PNNT)
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9 Business Development Companies to Buy for Growth originally appeared on usnews.com
Update 02/04/21: This story was originally published at an earlier date and has been updated with new information.