Business development companies (BDCs), a class of lending vehicles that have taken up some of the middle-market loan space previously occupied by banks, are largely trading below net asset value (NAV) – meaning they will continue turning to the private markets to raise capital. The trend also means it’s less appealing to create a BDC at the moment – a stark contrast from 2012 and 2013, when BDCs were the belle of the ball.
Public BDCs trading below NAV cannot issue equity in the public markets, so if they want to raise more money, they will have to turn to the private markets. But BDCs trading above or at NAV are also turning to the private markets to raise capital because of the interest they receive from institutional investors, such as pension funds and endowments, which are hoping for yield from private debt investments.
The BDCs that are trading below NAV are doing so for a combination of reasons, including investor concerns. The list of worries is subjective but includes BDCS paying more in dividends than they are earning; the potential dilution of book value that comes when BDCs have yield problems and will stretch for deals they perhaps shouldn’t; and the credit cycle.
“In that whole equation, the concern is that they will cut their dividends – most people buy the stock for the dividend,” says Aaron Peck, managing director of Monroe Capital’s BDC, which is trading above NAV. “A big picture consequence is that there has been a very small amount of issuance because of where BDCs are trading,” Peck says.
While having so many BDCs unable to raise public capital gives others a better chance at competing on deals, it’s not necessarily a good thing. “It’s bad for all BDCs when the sector is trading at a discount,” Peck says. “It’s harder to get interest in the sector.”