I see very little discussion on these boards or in analyst reports about several attributes of BDCs.
First, are they internally or externally managed. ACAS, ALD and MCGC are internally managed while ARCC, AINV and TICC are externally managed. I favor internally managed but agree on the sell rating on ALD because they are more dependent on gains than NII. Note that while ARCC and MCGC may be contemplating rights offerings ACAS is engaged in share buybacks. No externally managed fund appears interested in share buy backs because it would reduce the assets and their fees.
I track the total operating expenses as a percentage of the NII before operating expenses (income less interest expenses). That is what percentage of the pie is taken out by management fee and operating expenes (excluding interest).For the nine months ended 9-30-07 AINV 30.4%, ACAS 37.1%,MCGC 31.3%, TICC 26.7% and nine months ended 12-31-07 for ARCC 38.7%. Its interesting that ARCC is on the high side despite the fact they have a base management fee of 1.5% of assets v. 2% for other externally managed BDCs.
What NII return on NAV can the shareholder get before management of the externally managed BDCs takes their 20%. AINV is 7% and ARCC 8% before they take 100% to bring them up to 20% and then 20% beyond that. However, TICC has a hurdle rate in 2007 of 9.7% (based on treasury rates) and there is no "claw back" to bring them to 20%. They take 20% over the 9.7%. This means that the shareholder gets 9.7% of NAV befor any incentive fee by management. With the stock at a nice discount to NAV this is a 12% plus return on market before incentive fee.
What part of the dividend is covered by NII?. The NII is a better measure of yield than the dividend.
In general, I favor the internally managed BDC's because their interests appear to be better aligned with mine. I do like the fact that TICC has a high 9.7% hurdle rate with no "claw back" of their 20% for results above the hurdle rate. They take only 26.7% of the NII pie compared to others as high as 40%. Operating expenses, exclusive of incentive fees on gains, of 40% is too big a slice of the pie.
Lastly, AINV appears to be alone in not publishing a break-down of their investments into the 5 categories: where the 4th category is return of principal but some impairment of income and the 5th is loss of some principal.
Do the Stifel reports discuss operating expenses of the BDCs and the pros and cons of being internally v. externally managed? What about incentive fee hurdle rates for dividend distributions?
"First, are they internally or externally managed. ACAS, ALD and MCGC are internally managed while ARCC, AINV and TICC are externally managed. "
I believe two newcomers, PNNT and TCAP, are also internally managed - at least I couldn't find any reference to external management...
PNNT is run by Arthur Penn, previously COO at AINV. TCAP is a nearby** Raleigh, North Carolina BDC, that grew out of a SBA-sanctioned, and supported vehicle. (**being physically close to my home is one of the attractions for me...)
PNNT piggy-backed on a bunch of syndications, mostly AINV I believe, because they had to ear-mark investments for the sum they raised in their IPO - (they also have debt capital and lines of credit to accompany the equity they raised...) - they are gradually shifting capital away from the initial investments they made to those chosen by the pros on their internal team.
TCAP apparently had lots of opportunities they couldn't handle as an SBA...it appears they choose their own investments and don't do much participating in the in the syndications of the bigger guys.
"ARCC 8% before they take 100% to bring them up to 20% and then 20% beyond that. "
Good catch. I completely missed that in the 10-K. The language of the "pre-incentive fee" discussion lulled me to sleep before I got to this section of the 10-K (page 12 of the latest 10-K)
" We will pay Ares Capital Management an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
• no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;
• 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.50% in any calendar quarter. We refer to this portion of our pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 2.50%) as the "catch-up." The "catch-up" is meant to provide our investment adviser with 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 2.50% in any calendar quarter; and
• 20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.50% in any calendar quarter.
These calculations will be appropriately pro rated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and management agreement, as of the termination date) and will equal 20.0% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation for such year. "
Stifel report does not dwell on this aspect of ARCC...their focus was on investments that would lose value in the (hopefully shallow) recession...they did however discuss management fees in the AINV report...
If ARCC gives up 20% of NOI, why is it still a reasonable investment vis-a-vis other internally managed BDCs, notably ACAS?...
the stifle reports do not deal with the pros and cons of internal vrs external managment. The reports themselves can be found on the bdc board at yahoo. It is very much worth your while to read them yourself.
The points you raised are interesting and worht considering.TIA