Hi I'm Jimmy in this video
we're looking at the basics of
business development companies or
BDC is for short.
We're going to run through how the
dividends for BDC can be as high
as they are.
Then we're going to look quickly at
two different BDC is to
get an idea of what BDC
tend to do then
in the end we're going to look
quickly at where business
development companies could fit in
our portfolio.
Okay let's get start with the very
basics. So what is a BDC
a business development company is a
publicly traded fund that
is essentially like a private equity
fund or a venture capital fund.
So generally BDC is focused
on the middle market
companies.
So middle market companies can
broadly be defined as
companies valued between somewhere
between 100 million and a billion
dollars.
So basically a BDC invests
in middle market companies perhaps
they make a loan to that company and
then collect interest payments or
perhaps they buy a piece of that
company by taking a piece of
equity or they become a shareholder.
So for us investors this
can be interesting because this
allows us to invest essentially
in a venture capital like structure
except for this one is publicly
traded and we can buy or sell
it just like we would buy an ETF or
read or a closed end fund.
So let's look quickly at two
examples.
The first one is areas capital
ticker symbol a BDC.
And this actually brings us to the
top reason why many people
like investing in BDC is that's
their dividend.
So over the past 12 months a BDC
has paid about a dollar 62 in
dividends and given that their stock
price is trading just short
of nineteen dollars a share.
Well that would give areas capital
a dividend yield of more than eight
and a half percent.
How do they do this we ask.
Well just like a real estate
investment trust we've got a master
limited partnerships business
development companies don't pay
corporate income taxes as long
as they pay out the majority of
their profits as distributions
to shareholders.
So this helps keep their dividend
much larger than the typical
company. OK.
Let's look at what a BDC actually
does from an investment perspective.
So this one slide I took out of an
investor presentation and I know
there's a lot going on here.
But generally speaking this does
a good job of laying out what
not just what areas does but also
what Beatty sees in general tend to
do. So let's break this one down a
bit. So this top section here called
products.
Well this is what BDC offers
to the companies that they invest
in. So basically we can look
as at a BDC as a bank
or as somewhere between what we
most normally might think of as a
bank bank lending money
and a venture capital company
which typically invests in startups
this lands somewhere in the middle
of that BDC is a very similar
except they do it for the middle
market companies.
OK. So we can really separate this
into two different categories.
The ones in the green box.
Well this is where the BDC makes
equity investments into the company.
So essentially they're getting a
piece of the stock of that company
and then the other ones are mostly
loans that the BDC is make.
Now this is important because BDC
is generally are going to be
dominated by the loans that they
make to companies.
Then when we jump down to the next
section well here this
tells us generally what the company
tends to do with the money that they
get from BDC is either
through a loan or through an
investment of some sort.
So here we could see that a lot of
this revolves around the growth of
the company. Maybe it's an
acquisition that the company wants
to make or restructuring
or maybe the companies look to
looking to fund just its general
growth.
Either way it's a BDC that can often
help fund this next level of
growth and in return the
company goes ahead and pays the BDC
in an interest rate or fees
or perhaps dividends if the BDC took
an equity stake.
Now if we're wondering why what
types of companies BDC tend to
invest and here's a pie chart
once again from areas presentation
and we could see that they're all
spread out amongst a ton of
different industries.
Now that's true for areas but not
true for everybody.
So now jump over to another BDC
and to get another aspect
of what BDC might do.
So the next one is the Apollo
Investment Corporation ticker symbol
a I envy now
Apollo has paid forty five cents
a quarter for the past four quarters
giving us a total of a dollar 80
given that they're trading at
slightly less than sixteen dollars
and 50 cents.
Well that's a dividend yield close
to eleven percent now wants to go to
Apollo's Web site.
This is on the front page.
We could see that they have
investments of two point six
billion. Now this is significantly
smaller than areas areas is one
of the largest out there.
So it's wide ranging.
They also say that 71 percent
of their loans are first tier
debt which is a good thing
tends to be a good thing as in
theory they have first rights to
collect.
They also say they invest in one
hundred twenty nine companies and
ninety nine percent of their loans
are floating rate loans.
And this could usually be a good
thing for BDC It's not just so
we're all on the same page.
A floating rate loan is
when the bank when there is a
benchmark rate of some sort.
Maybe it's the 10 year treasury or
lie board that's going away.
Or maybe it's the prime rate.
So basically they take a benchmark
and they say OK.
The benchmark is going to be the
prime rate and we're going to add 3
percent to that or 2 percent or
whatever it is.
And then the payments or the
interest charge to the customer
moves around based on where the
underlying interest rate is.
So either way as interest rates
move up or down.
Well in theory there could be some
consistency to the profits.
That's why Apollo would bring this
element the first page.
Now this could also lead in
theory to consistency of dividends.
Now I happen to have looked at the
history of Apollo and they've
actually dropped their dividend a
few times.
So I just want to bring out that
this is not intended to be an
analysis of Apollo or areas
capital. I'm just using these as
examples to illustrate how BDC
sees work in general.
If we want to see a more thorough
analysis on either one of these
BD Cs or perhaps a different BDC
altogether please let me know in
the comments below and we could do a
more thorough analysis of their
holdings their value things along
those lines.
OK. So to summarize BDC
sees are an investment
that traditionally landed
somewhere between typical stocks
and bonds although a bit closer
to the bond side and happy to trade
like stocks.
That being said I do think that
it would make sense if this was
going to be a piece of our
portfolio.
I think that it would make sense to
diversify with at least a couple
holdings but perhaps we want
to be involved in a particular
sector maybe the technology sector.
Well a BDC like Hercules Capital
ticker symbol HTGC
well they might be something we'd be
interested in because unlike areas
that's all spread out Hercules tends
to focus mostly on technology
companies. Then another thing to
consider with BDC in general is we
need to watch the feeds now these
fees aren't directly comparable to
the fees of an ETF or a mutual fund
but generally management fees
are something that is included that
comes out of revenue and depending
on whether or not the BDC is
internally managed or externally
managed could the
the fees they're going to be there.
And we it's something that we're
going to want to identify and see
what we think of their overall
profitability and returns things
like that. Now when it comes to
valuing of BDC
I've seen price to book use
I've seen some analysts target
a what they believed to be
a sustainable dividend rate and then
base the value off of that dividend
rate. So that is the basics of BDCs
and basically a
BDC is a something
that would give us access to the
middle market lending to the middle
market.
The question is do you think we
should do a deeper dive into any
of these BDC or maybe
we can create a top three list or
something like that that could be
interesting let me know what you
think in the comments below.
Do you think that access to this
middle market lending area with
high dividend yields but
somewhat volatile movement in the
stock price do you think that's a
good investment.
Let me know what you think in the
comments below.
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all the way into the video.
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