{"id":46927,"date":"2014-01-30T13:17:13","date_gmt":"2014-01-30T18:17:13","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=46927"},"modified":"2014-01-30T13:17:13","modified_gmt":"2014-01-30T18:17:13","slug":"business-development-companies","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2014\/01\/30\/business-development-companies\/","title":{"rendered":"Business Development Companies"},"content":{"rendered":"<h4><span style=\"font-size: small;\">By Andrey Dashkov<br \/>\n<\/span><\/h4>\n<p>Business Development Companies (BDCs) are publicly traded private debt and equity funds. I know that description isn\u2019t terribly sexy, but keep reading and you\u2019ll find there\u2019s a lot to be excited about.<iframe loading=\"lazy\" src=\"http:\/\/trk.caseyresearch.com\/f\/?content_id=718&amp;code=PIP&amp;editorial=business-development-companies\" height=\"1\" width=\"1\" frameborder=\"0\"><\/iframe><\/p>\n<p>BDCs provide financing to firms too small to seek traditional bank financing or to do an IPO, but at the same time are too advanced to interest the earliest-stage venture capitalist. These companies are often near or at profitability and just need extra cash to reach the next milestone. Filling this void, BDCs provide funds to target companies in exchange for interest payments and\/or an equity stake.<\/p>\n<p>BDCs earn their living by lending at interest rates higher than those at which they borrow. Conceptually, they act like banks or bond funds, but with access to yields unlike any you\u2019ll see from a traditional bond fund. The interest rate spread\u2014meaning the difference between their capital costs and interest they charge their clients\u2014is a major component of their business.<\/p>\n<p>Oftentimes, a BDC will increase its dividend when market interest rates have not changed. Like a bank, the more loans it has in force, the more it profits. Increasing its dividend payout will generally have a very positive effect on its share price.<\/p>\n<p>Unlike banks or many other traditional financial institutions, however, BDCs are structured to pay out more than 90% of their net profits to the shareholders. In return, BDCs don\u2019t pay any income tax. In essence, their profits flow through to the owners. Many investors like to own BDCs in an IRA to create tax-deferred or tax-free income. The opportunity to use them for tax planning purposes, access to diversified early-stage financing, and the impressive dividend yields they deliver make them a perfect fit for the\u00a0<strong>Bulletproof Income<\/strong>\u00a0strategy we employ at <a href=\"http:\/\/www.millersmoney.com\/go\/vyr5x-2\/PIP\" target=\"_blank\"><em>Miller&#8217;s Money Forever<\/em><\/a>.<\/p>\n<h3><strong>The Clients<\/strong><\/h3>\n<p>As a business model, BDCs emerged in response to a particular need: early-stage companies needed funding but couldn\u2019t do it publicly due to their small size. At the same time, these companies didn\u2019t match the investment criteria of so-called angel investors or venture capital providers. Enter the Business Development Company.<\/p>\n<p>BDC teams, through expertise and connections, select the most promising companies in their fields and provide funds in return for a debt or equity stake, expecting gains from a potential acquisition scenario and a flow of interest payments in the meantime. The ability to selectively lend money to the right startup companies is paramount. It makes little difference how much interest they charge if the client defaults on the loan.<\/p>\n<p>With limited financing options, BDCs\u2019 clients may incur strict terms regarding their debt arrangements. The debt often comes with a high interest rate, has senior-level status, and is often accompanied by deal sweeteners like warrants which add to the upside potential for those with a stake in the borrowing company.<\/p>\n<p>In return for these stringent terms, the borrower can use the funds to:<\/p>\n<p>\u2022Increase its cash reserve for added security;<\/p>\n<p>\u2022Accelerate product development;<\/p>\n<p>\u2022Hire staff and purchase licenses necessary to advance R&amp;D, etc.<\/p>\n<p>\u2022Invest in property, plant, and equipment to produce its product and bring it to market.<\/p>\n<p>Turning to a BDC for funds allows a company to finance its development and minimize dilution of equity investors while reaching key value-adding milestones in the process.<\/p>\n<h3><strong>What\u2019s in It for Investors?<\/strong><\/h3>\n<p>In addition to the unique opportunity to access early-stage financing, we like BDCs for their dividend policy and high yield. The Investment Act of 1940 requires vehicles such as BDCs to pay out a minimum of 90% of their earnings. In practice, they tend to pay out more than that, plus their short-term capital gains.<\/p>\n<p>This often results in a high yield. Yields of 7-12% are common, which makes this vehicle unique in today\u2019s low-yield environment. The risk is minimized by diversification\u2014like a good bond fund, they spread their assets over many sectors. This rational approach and the resulting income make the right BDC(s) a great addition to our Bulletproof Income strategy.<\/p>\n<h3><strong>BDCs and the Bulletproof Income Strategy<\/strong><\/h3>\n<p>In short, BDCs serve our strategy by:<\/p>\n<ul>\n<li>Providing inflation protection in the form of high yields and dividend growth;<\/li>\n<li>Limiting our exposure to interest-rate risk, thereby adding a level of security (some BDCs borrow funds at variable rates, but not the ones we like);<\/li>\n<li>Maintaining low leverage, which BDCs are legally required to do;<\/li>\n<li>Distributing the vast majority of their income to shareholders, thereby creating an immediate link between the company\u2019s operating success and the shareholders\u2019 wellbeing\u2026 in other words, to keep their shareholders happy, BDCs have to perform well.<\/li>\n<\/ul>\n<h3><strong>How Should You Pick a BDC?<\/strong><\/h3>\n<p>Not every BDC out there qualifies as a sound investment. Here\u2019s a list of qualities that make a BDC attractive.<\/p>\n<ul>\n<li><strong>Dividend distributions come from earnings.<\/strong>\u00a0This may sound like common sense, but it\u2019s worth reiterating. A successful BDC should generate enough quarterly income to pay off its dividend obligations. If it doesn\u2019t, it will have to go to the market for funds and either issue equity or borrow\u2014or deplete cash reserves it would otherwise use to fund future investments. An equity issuance would result in share dilution; debt would increase leverage with no imminent potential to generate gains; and a lower cash reserve is no good either. We prefer stocks that balance their commitments to the shareholders with a long-term growth strategy.<\/li>\n<li><strong>The dividends are growing.<\/strong>\u00a0This is another characteristic of a solid income pick, BDC or otherwise. Ideally, the dividend\u00a0<em>growth<\/em>\u00a0would outpace inflation, in addition to the\u00a0<em>yield<\/em>\u00a0itself being higher than the official CPI numbers. This growth can come from increasing the interest rate spread and also having more loans on the books.<\/li>\n<li><strong>Yields should be realistic.<\/strong>\u00a0We\u2019d be cautious about a BDC that pays more than 12% of its income in dividends. Remember, gains come from the interest it receives from the borrowers. Higher interest indicates higher-risk debt on a BDC\u2019s balance sheet, which should be monitored regularly.<\/li>\n<li><strong>Fixed-rate liabilities are preferred.<\/strong>\u00a0We need our BDC to be able to cover its obligations if interest rates rise. Fixed rates are more predictable than floating rates; we like the more conservative approach.<\/li>\n<li><strong>Their betas should be (<em>way<\/em>) below 1.<\/strong>\u00a0We don\u2019t want our investment to move together with the broad market or be too interest-rate sensitive. Keeping our betas as low as possible provides additional opportunities to reduce risk, which is a critical part of our strategy.<\/li>\n<li><strong>They are diversified across many sectors.<\/strong>\u00a0A BDC that has 100 tech companies in its portfolio is not as well diversified as a one with 50 firms scattered across a dozen sectors, including aerospace, defense, packaging, pharmaceuticals, and others. Review a company\u2019s SEC filings to see how many baskets its eggs are in.<\/li>\n<\/ul>\n<h3><strong>Wrap-up<\/strong><\/h3>\n<p>Right now, BDCs look very interesting to income-seeking investors. They provide excellent yields, diversification opportunities, and access to early-stage companies that previously only institutions enjoyed. They also fit in with <a href=\"http:\/\/www.millersmoney.com\/go\/vyr8y-2\/PIP\" target=\"_blank\"><em>Miller Money Forever<\/em>&#8216;s<\/a> Bulletproof Income strategy, the purpose of which is to provide seniors and savers with real returns, while offering maximum safety and diversification.<\/p>\n<p>Catching a peek our Bulletproof portfolio is risk-free if you try today. Access it now by subscribing to <a href=\"http:\/\/www.millersmoney.com\/go\/vyrtz-2\/PIP\" target=\"_blank\"><em>Miller&#8217;s Money Forever<\/em><\/a>, with a 90-day money-back guarantee. If you don&#8217;t like it, simply return the subscription within those first three months and we&#8217;ll refund your payment, no questions asked. And the knowledge you gain in those months will be yours to keep forever.<\/p>\n<p>&nbsp;<\/p>\n<p>See original article: <a href=\"http:\/\/www.millersmoney.com\/go\/vyr2w-2\/PIP\">Business Development Companies<\/a><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By Andrey Dashkov Business Development Companies (BDCs) are publicly traded private debt and equity funds. I know that description isn\u2019t terribly sexy, but keep reading and you\u2019ll find there\u2019s a lot to be excited about. BDCs provide financing to firms too small to seek traditional bank financing or to do an IPO, but at the &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/forex-news\/2014\/01\/30\/business-development-companies\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Business Development Companies&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-46927","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/46927","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=46927"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/46927\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=46927"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=46927"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=46927"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}