Which BDC is Best Positioned?
The entire BDC industry will be challenged by increased uncertainty in interest rates. Still, our favorite firm in the industry remains Main Street Capital Corporation (NYSE:MAIN), even though it trades at a premium to some of its peers. We like the company’s relatively conservative investment philosophy which focuses on senior secured debt rather than equity and junior debt.
Valuentum also likes Main Street Capital Corporation (NYSE:MAIN)’s management team, which holds a strong percentage of shares outstanding, giving them ample skin in the game and incentive to keep the firm’s cost structure low. We love when management’s interests are aligned with those of long-term shareholders. CEO Vincent Foster spent years working in capital markets for an accounting firm before starting Main Street’s predecessor. We think Foster understands the deal landscape as well as any CEO in the space, and the majority of his net worth is dependent on Main Street Capital Corporation (NYSE:MAIN)’s success.
While Main Street Capital Corporation (NYSE:MAIN) doesn’t have the highest dividend of the cohort, we think its yield could be among the least risky (not safest). We like the firm’s focus on senior debt instruments, and it does not have to rely on exiting equity positions to make dividend payments. Most competitors have higher costs associated with portfolio management, and Main Street tends to have a conservative investment mix. Further, since the company doesn’t have the same ambitious yield as some of its some competitors, management won’t be pressured into low-quality investment opportunities to support the yield.
Triangle Capital Corporation (NYSE:TCAP), like Main Street, trades a premium to net asset value as investors give a solid management team additional weighting in the valuation. However, Triangle Capital Corporation (NYSE:TCAP) takes on riskier subordinated and 2nd lien notes, that while boosting the yield, create a riskier portfolio. Although the company has done a wonderful job of managing its portfolio thus far, we’d still prefer Main Street due to its like risky portfolio of (mostly) senior secured debt. Looking forward, we’re not very bullish on Triangle Capital Corporation (NYSE:TCAP)’s capital appreciation prospects. Shares trade at a hefty premium to net asset value, and we are not forecasting great earnings growth.
Valuentum’s Take
Investing in a BDC is a lot like investing in a private equity firm—investors must judge the managers, look at the risk profile of the portfolio companies/structure, and the investment style. Although interest rate changes remain a large risk going forward, we doubt there will be a spike that the industry is unable to handle. However, near-term upward rate pressure could lead shares of BDCs to fall.
The article The Dangers of BDCs originally appeared on Fool.com and is written by RJ Towner.
RJ Towner has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. RJ is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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