6 Investing Lessons From BDCs

by Lawrence Meyers | December 3, 2012 9:01 am

Business development companies (BDCs) are great places to invest your money, particularly because they pay very large dividends. But the other reason to pay close attention to BDCs is the way they handle their own investment research: The due diligence they perform isn’t much different from how you should perform yours.

The difference is that most investors don’t do nearly the research that BDCs do, yet both have the same thing at stake: money.

While BDCs raise some of their capital by going public, much of their initial capital comes from high-net-worth individuals who place their money into these private equity funds. They do this to gain exposure to the kind of middle-market opportunities the average retail investor doesn’t have access to. Plus, these deals tend to provide market-beating returns.

BDCs go for debt investments that yield at least in the low teens, and often higher, and they take an equity position or ask for warrants from the companies they invest in. They’ll invest in leveraged buyouts, management buyouts, recapitalizations, growth financing and acquisition financing. Unlike the average investor, however, they also offer their own expertise to assist the companies they invest in.

The criteria BDCs look for include the following:

Now, do any of these criteria sound odd to you? None of them should. These are all essential for any retail investor to look at. Of course, you should also take a hard look at the financials. You must be vigilant as you go over the financials for anything that seems odd or out of place. If you don’t understand how things like inventory or long-term debt affect the business you’re considering, then learn about these factors, or move on.

Some of the BDCs I’ve looked at that maintain these high underwriting standards include Prospect Park (NASDAQ:PSEC[3]), Blackrock Kelso (NASDAQ:BKCC[4]), TICC Capital (NASDAQ:TICC[5]), Apollo Investment (NASDAQ:AINV[6]) and Main Street Capital (NASDAQ:MAIN[7]).

As always, do your own due diligence on these BDCs, or you’ll have missed the whole point of this article.

As of this writing, Lawrence Meyers didn’t own any securities mentioned here.

Endnotes:
  1. this list: mailto:http://www.tcap.com/tcap-portfolio
  2. TCAP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TCAP
  3. PSEC: http://studio-5.financialcontent.com/investplace/quote?Symbol=PSEC
  4. BKCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKCC
  5. TICC: http://studio-5.financialcontent.com/investplace/quote?Symbol=TICC
  6. AINV: http://studio-5.financialcontent.com/investplace/quote?Symbol=AINV
  7. MAIN: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAIN

Source URL: http://investorplace.com/2012/12/6-investing-lessons-from-bdcs/
Short URL: http://invstplc.com/1nyeQcU