Internally managed BDC's appear to have lower operating expenses than externally managed. However, in lean times the external may have an advantage because of their hurdle rates. ARCC pays 8% of NAV (now higher % on market) before the advisor takes 20%. For the latest reported 9 months ACAS had operating expenses of 37.1% of NII before operating expenses (income less interest expense) v 38.2% for ARCC. However, ACAS has ramped up their operating expenses as they have expanded into managing external funds.
The principal advantage of internal management is that it better aligns managent's interests with those of the shareholder. ACAS is going to buy back shares at a discount to NAV. ARCC on latest conference call said they were not interested in buybacks. This despite the fact that the market yield on ARRC at times exceeded their current returns on investment. Instead, SEC filings indicate that they have an interest in a rights offering for their stock. Obviously, a rights offering as they are prohibited from selling additional shares below NAV without shareholder approval. Left unsaid was that buybacks would reduce the assets and the fees to the advisor. ACAS is incentivized to go out and get 2% fees for managing external fees in order to improve the bottom line of ACAS. There is less incentive for an externally managed BDC to do this.
When these BDC's hit 14% to 15% market yields v internal returns of 12%, buy backs appear to make sense. Rights offerings at a discount to NAV appear to make sense only for the advisors not the shareholders. The difference between external and internal management is clearly now in the spotlight.