Above-average dividends get attention.
A business development company, or BDC, is a unique class of company that operates much like a private equity firm but with many of the same oversight requirements as a publicly-traded stock. BDCs hold big appeal among income investors. Profits from loans and other investments are delivered to shareholders via regular and generous dividends but without the constraints of conventional private equity funds. Also, current low interest rates allow them to access capital cheaply while a surging U.S. economy means a tailwind behind their investments. The result has been big dividends and share appreciation for many. If you're looking to tap into the BDC trend, here are some to consider.
Apollo Investment Corp. (AINV)
Apollo Investment is an arm of the massive private equity firm Apollo Global Management that commands more than $300 billion in assets at present. AINV is a great example of how asset managers use a BDC to reap its favorable corporate structure and provide an income-rich share class to public market investors. AINV also benefits from being a financing vehicle that Apollo uses to finance big deals via both secured and unsecured debt. If you're going to invest in a BDC that dabbles in unsecured debt -- that is, a loan without protection in the event of a bankruptcy -- it helps to have a direct tie to other senior investors.
Current yield: 9.94%
Ares Capital Corp. (ARCC)
Ares Capital Corp., an $8 billion BDC, is among the largest names in the space. It specializes in loans to middle-market companies, acquisitions, restructurings and rescue financing of troubled firms. The fund typically targets firms under $200 million in size, with a rough ceiling of about $400 million on a single investment. Investments include a dental services network, real estate and auto parts manufacturers. Spreading cash around ensures a diversified portfolio, and ARCC's expertise helps it find profits in places others may skip. And with a favorable economic environment, the time is perfect for this kind of higher-risk but high-reward investment.
Current yield: 8.5%
BlackRock Capital Investment Corp (BKCC)
BKCC is affiliated with BlackRock -- the largest asset manager in the world by many measures -- and is designed to make smaller and targeted investments, typically in the $50 million range. BlackRock is a well-financed outfit that can make all manner of investments across the global economy, and having a dedicated financing unit like BKCC helps both the parent company as well as individual shareholders. If you don't have the cash to plow $1 million into BlackRock's boutique private equity strategies or if you don't have the stomach for that kind of risk, then simply rely on BKCC for a share of the growth and a big regular payday through dividends.
Current yield: 11%
FS KKR Capital Corp. (FSK)
This is another business development company with roots in the biggest names of Wall Street. For those who know their market history, KKR is a very recognizable acronym for Kohlberg Kravis Roberts -- a titan of the investment world that made a name for itself with the massive 1989 buyout of RJR Nabisco. FSK benefits from close proximity to the deal-making investment firm, offering what's called "mezzanine" financing -- a hybrid between debt and equity investments that allows the lender to convert to an equity stake in the event of default. Tactics like this maximize yield for FSK shareholders as it deploys capital.
Current yield: 12.1%
Gladstone Investment Corp. (GAIN)
Gladstone is a smaller name in the BDC world specializing in lower middle-market investments. That typically means a firm valued at under $100 million but large enough that it can't easily access business financing through conventional means. Firms like GAIN are great examples of how investors step up to fill a niche for the benefit of all parties. These smaller companies need financing to operate and grow and GAIN shareholders get a juicy dividend as the loan payments roll in. And, the broader U.S. economy benefits as small businesses find capital they need to become larger.
Current yield: 6.2%
Golub Capital BDC (GBDC)
Golub Capital primarily invests in senior debt where it is at the top of the pecking order, including "unitranche" debt where it is a single lender of both senior and subordinated debt. This gives GBDC the certainty of being first in line but also a slightly higher rate closer to what junior lenders would demand. GBDC is led by David B. Golub, a businessman who previously helped run private equity firms and has a long history of sitting on the boards of both private and public companies. This experience helps identify the kind of smaller businesses that are worthy of investment, and which ones will yield the best returns.
Current yield: 7.2%
Hercules Capital (HTGC)
Hercules explicitly labels itself to be a "growth capital" company, looking to place senior secured loans and capital investments to privately held firms. These largely include venture capital-backed companies such as startups, but also expanding middle-market firms and even select publicly traded stocks where it sees an opportunity. Hercules targets traditional technology companies and is increasingly focused on energy technology, such as sustainable and renewable energy businesses. Based in Silicon Valley, this BDC is unique in its approach to high-tech debt investments that can deliver outsized returns if conditions are right.
Current yield: 9.1%
Prospect Capital Corp. (PSEC)
Prospect Capital is a BDC that does it all. It finances both middle-market and mature companies, late-stage firms and emerging growth investments, turnarounds as well as growth capital investments. One unifying force across its investments, however, is a focus on small-sized and medium-sized private companies that don't have the scrutiny and pressures of large public companies. Currently, PSEC investments include health care service providers, food product companies, IT service providers and energy companies. This diversified portfolio helps smooth out any areas that run into trouble but also allows Prospect to seek growth wherever it finds it.
Current yield: 11.2%
PennantPark Investment Corp. (PNNT)
PennantPark is one of the smaller BDCs, with a market capitalization of less than $450 million at present. That limits the size of its debt and equity investments but doesn't mean the stock delivers less income potential -- as evidenced by the double-digit yield. PNNT typically invests in building and real estate projects, which include hotels, child care and education facilities, as well as consumer and industrial products. Its current portfolio includes an insurance broker, a primary care medical clinic operator and marketing firms.
Current yield: 11%
BDCs to buy for growth:
-- Apollo Investment Corp. (AINV)
-- Ares Capital Corp. (ARCC)
-- BlackRock Capital Investment Corp (BKCC)
-- FS KKR Capital Corp. (FSK)
-- Gladstone Investment Corp. (GAIN)
-- Golub Capital BDC (GBDC)
-- Hercules Capital (HTGC)
-- Prospect Capital Corp. (PSEC)
-- PennantPark Investment Corp. (PNNT)
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