Saturday, December 18, 2010

[Video] Business Development Companies (BDCs) - One Way to Find Yield

The great thing about the markets is it is a never ending learning process; there is always something new to discover whether a niche sector or new stock.  All these years in the market and I had never really investigated Business Development Companies (BDCs) until the past month.  In in a low yield environment I am looking for some asset classes to park cash in, to balance the 'high growth, relative strength' portion of my strategy and the obvious choices are REITs and Master Limited Partnerships.  [Seeking Alpha - Outrageous Opportunities in Upstream MLPs]  Like REITs, BDCs have to pay out almost all their income hence create a nice dividend stream - many cases roughly 10% (despite a huge run up in share prices from early 09).  Unlike some MLPs however there is more risk/reward here since the BDCs normally invest in smaller to mid sized companies... so during a serious market downturn they won't offer much protection.  But in an era of cheap money being pushed out the wazoo and a year ahead that should be full of consolidation and M&A opportunities, these companies could be well positioned. 

A video on the topic from CNBC from last August on the topic - definitely an area I am spending more time learning about.

6 minutes



Ever feel like venture capital is exclusive to the wealthy  Fortunately, there is a way for all investors to participate in the medium. On The Strategy Session yesterday, we detailed a trading tool for the investment of upcoming businesses.

My "Call-to-Action" is to explore and consider Business Development Companies (BDC's) for your portfolio.  BDC's are public firms that invest in small businesses the way a venture capitalist would. They can be bought on the open market, and here's the best part.

Janney Montgomery reports that the average yield on a BDC is 9.7 percent. Remember, we have been discussing ways on The Strategy Session and right here in the K-Call about how in this low-rate environment, investments that return income are extremely attractive. Falling into this category are MLP's, REITS, and high-dividend yielding stocks.  Add BDC's to this list.

On yesterday's show, Lawrence Golub of Golub Capital BDC (and husband of our Fast Money friend, Karen Finerman) made an important distinction between BDC's now and in 2008.  When I asked him about the collapse of American Capital Limited (ACAS) and Allied Capital Corporation (ALD), Golub pointed out that the loan structure is much improved since then. 

Additionally, alignment of the fees, critical to success, has sharpened. Shareholders get more for what they paid than they did two years ago.  If you ever wanted to be a venture capitalist, or simply invest like one, BDC's are high-yielding products that can capture share of that universe.

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