Included in this newsletter:
- Actual Total Returns by BDC
- Improved BDC Fee Structures & Shareholder Alignment
- Fee Structures vs. Actual Total Returns
- New BDCs Adding to Coverage
Actual Total Returns – Last 17 Months
Explanation of total returns: The ‘Change in Stock Price’ assumes you purchased the stock at the beginning of 2014 and sold as of June 12, 2015. Dividends do not assume reinvestment and are calculated using the amounts paid divided by the purchase price at the beginning of 2014.
Improved BDC Fee Structures & Shareholder Alignment
I am currently in the process of assessing new BDCs with fee structures that protect total returns to shareholders. Specifically, I am looking for realized/unrealized losses to be included when calculating incentive fees for management with a look-back feature to keep management on the hook for the performance of investments over the long-term. I will be referring to this as a ‘high water mark’ in upcoming articles.
FSIC has included this feature and recently discussed on the last earnings call: “Alignment of management interests with those of FSIC shareholders is of critical importance to us. We have sought to achieve this through the adoption the three-year “high water mark” for our income incentive fee and through our strong level of sponsor commitment.”
Why do fee structures matter?
The following chart is similar to the one used in my “BDC Total Returns & Continued Bifurcation” article (updated with returns from previous table) and I have identified which BDCs have higher vs. lower fee structures as well as the ones with a high water mark or look-back feature. Historically, BDCs with lower fee structures have provided higher returns to investors:
As you can see AINV and GLAD have higher returns, compared to other higher cost BDCs that could be partially due to waived management fees to ensure dividend coverage on an annual basis.
Potential BDCs Added to Coverage
All of the BDCs that I actively cover have been public for at least 3 years, with the exception of TSLX and FSIC that I have recently added. Over the last ~2 years, there have been at least 10 new publicly traded BDCs that have a high water mark or look-back features to their incentive programs, including Goldman Sachs BDC (GSBD) that I believe is currently overpriced with a much lower than average dividend yield. However, I believe that there are many other BDCs that are potentially under-priced and overlooked by investors.
Beyond a shareholder-friendly fee structure, investors need to consider the following:
- Dividend coverage and growth potential
- Risk profile/portfolio credit quality
- Management quality
- Valuation and pricing
- Potential NAV growth and total returns
Subscribers to premium reports will also receive advance notice of upcoming articles on Seeking Alpha indicating whether or not they will likely have positive coverage of these potentially overlooked BDCs, including one that will be coming out later this week. Please visit "premium reports" if you are interested in more information on BDCs including:
- Rankings (risk, return, pricing, dividend potential)
- Individual BDC Projections
- Pricing and Valuation
- Dividend Coverage Potential
- Suggest BDC Portfolios
- My Current Positions
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