Alvin Murstein, CEO of Medallion Financial (NASDAQ:TAXI), has been in the taxi business for more than 40 years and funding medallions since 1979. Today, Medallion is a specialty finance company that does more than make loans for taxi medallions.
Although the medallion business represents 63% of its $1.14 billion in assets under administration, another 13% is for commercial lending, 20% for consumer lending and the remaining 4% of its assets are investment securities and equity investments.
In 2011, Medallion originated $471 million in new investments. In most years, it delivers between 30 cents and $1 per share in net investment income and 20 to 50 cents per share in unrealized appreciation. It’s because of this consistency that TAXI is able to distribute between 60 and 80 cents per share in dividends annually.
That’s critical given Medallion’s mandate as a regulated investment company. During the past 10 years, it has averaged a yield of 5.8% with another 4% to 5% in appreciation, and it currently yields around 8%. Income investors should enjoy TAXI’s stability.
Lastly, I like the look of TCP Capital (NASDAQ:TCPC), a BDC that only went public in April. Its investment manager is Tennenbaum Capital Partners, a provider of middle-market financing since 1999. Tennenbaum created TCP Capital in July 2006, combining two funds it managed and $419 million in shareholder contributions.
Originally established as a closed-end fund, TCP Capital became a BDC immediately before its initial public offering, which sold 5.75 million shares at $14.75 for net proceeds of $81.4 million. Shareholders on board since 2006 have received $196 million in distributions, or $12.43 for every post-IPO share, which works out to an annualized yield of approximately 8.1%.
Of course, that’s the good news. The bad news is that TCP’s net asset value in July 2006 was $26.64; today, post-IPO, it is $14.77 a share. Investors involved from the beginning have basically broken even, which isn’t all that bad when you consider the Russell 2000 is only up 9% in the same time frame, and it has a lot more diversification.
Investors who buy into TCP Capital are getting in after much of the pain already has been felt. At the company’s inception in 2006, its total liabilities were $289 million, or 33% of total assets. At the end of March it was $76 million, or 17% of total assets. With the exception of its big down year in 2008 when its net assets from operations declined by $189 million, it has been an extremely positive situation. From where I sit, this looks like a great entry point.
I like BDCs because they lend and invest in businesses that often can’t expand without it. They’re not like JPMorgan Chase (NYSE:JPM) and the rest of the big banks who spend more time betting on derivatives than they do lending money to businesses. It’s important that you understand how each BDC works before you invest (because they’re all slightly different), but the three above are good places to start.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.