Private equity (PE) firms get a lot of press for the incredible
returns they're able to generate. They turn huge profits by
offering debt financing, equity investment and consulting services
to closely-held firms. When the projects meet with financial
success, the private equity group profits handsomely. A few of the
larger PE funds have consistently achieved annual gains in excess
of +20%.
The main problem for most of us? Unless you meet strict income and
net worth requirements, you're largely forbidden from investing in
a private
equity fund
. So how can the average investor gain exposure to this type of
investment?
By investing in a
business development company (
BDC
)
.
BDCs are similar to private equity firms, but are traded on public
markets. BDCs focus their attention on small companies often
considered too risky to receive a loan from a bank. This high risk
level allows BDCs to charge high rates, and earn large returns.
BDCs provided start-up capital to some of today's brightest stars,
including
Google (Nasdaq: GOOG)
,
Apple (Nasdaq: AAPL)
and
Intel (Nasdaq: INTC)
.
Though BDCs may seem risky, they're really not. Like a
mutual fund
, a
BDC
typically invests in a relatively large number of firms over a
range of different sectors, thus diversifying its otherwise high
level of risk. BDCs also tend to perform well in bear markets. When
credit is tight and banks are less willing to make speculative
investments, more companies turn to BDCs for funding, enabling them
to lock in more favorable lending terms.
One final reason to own BDCs is that they're tax-advantaged. BDCs
are exempt from federal taxes as long as they (1) pay 90% of income
to shareholders as dividends, and (2) maintain a
debt-to-equity ratio
below 1.0. As you can imagine, the 90%
dividend payout ratio
typically leads to high dividend yields.
Here is a list of BDCs along with their market cap and juicy
dividend yields:
|
Company (Ticker)
|
Market Cap ($million)
|
Dividend Yield as of 8/19/10
|
| Apollo Investment Corporation (Nasdaq:
AINV) |
1,710 |
12.02% |
| Ares Capital Corporation (Nasdaq: ARCC) |
1,850 |
9.73% |
| BlackRock Kelso Capital Corporation (Nasdaq:
BKCC) |
2,800 |
12.13% |
Capital Southwest Corporation
(Nasdaq: CSWC) |
323 |
.92% |
Fifth Street Finance Corporation
(Nasdaq: FSC) |
549 |
11.91% |
Gladstone Capital Corporation
(Nasdaq: GLAD) |
219 |
8.05% |
| Gladstone Investment Corporation (Nasdaq:
GAIN) |
126 |
8.39% |
| Hercules Technology Growth Capital, Inc.
(Nasdaq: HTGC) |
349 |
8.31% |
| Kayne Anderson Energy Development Co. (
KED
) |
147 |
8.29% |
Kohlberg Capital Corporation
(Nasdaq: KCAP) |
114 |
13.39% |
Main Street Capital Corporation
(Nasdaq: MAIN) |
226 |
10.01% |
| MVC Capital Inc. (
MVC
) |
305 |
3.81% |
NGP Capital Resources Co.
(Nasdaq: NGPC) |
168 |
8.71% |
| PennantPark Investment Corporation (Nasdaq:
PNNT) |
318 |
10.30% |
Prospect Capital Corporation
(Nasdaq: PSEC) |
673 |
12.87% |
Saratoga Investment Corporation
(
ASR
) |
1,390 |
4.08% |
| Solar Capital Ltd. (Nasdaq: SLRC) |
658 |
12.09% |
| THL Credit, Inc. (Nasdaq: TCRD) |
226 |
1.72% |
| TICC Capital Corp. (Nasdaq: TICC) |
244 |
9.68% |
Medallion Financial Corporation
(Nasdaq: TAXI) |
123 |
8.57% |
Triangle Capital Corporation
(Nasdaq: TCAP) |
174 |
11.29% |
Keep in mind that, before investing in a BDC, it is important to do
the research! Since the performance of the BDC hinges upon its
underlying assets, thoroughly examine the companies in which the
BDC is investing (in this case the small, closely-held business
looking to the BDC for capital). Putting in the time doing your
homework can help you determine which members of our list are
healthy and able to sustain their high
yield
.
To read more about BDCs, check out our article,
Why Invest in Business Development Companies
?
InvestingAnswers