Positioned squarely between Venture Capitalists and the Big Banks is a type of company known as the Business Development Company (BDC). BDCs were initially created to help grow small companies that had outgrown their need for Venture Capital and entered into the realm of publicly traded companies. These small companies were usually in their initial stages of development or expansion. These small companies are often too small for the Big Banks to consider doing business with them so they generally turn to the BDCs for help. BDCs are generally set up much like closed-end investment funds and are actually public companies that are listed on the NYSE, AMEX and Nasdaq.
To qualify as a BDC, companies must be registered in compliance with Section 54 of the Investment Company Act of 1940. A major difference between a BDC and a venture capital fund is that BDCs allow smaller, non-accredited investors to invest in startup companies. Some of the reasons why BDCs have become popular is that they provide permanent capital to their management, allow investments by the general public and use mezzanine financing opportunities.
There are quite a few publicly traded BDCs and many of them are listed on this site in the section labeled "Business Development Companies" which can be found in the Investing drop down menu above or by clicking here. While there are many great companies listed there and I own stock in a number of these companies, two of my favorites are Ares Capital Corporation and Main Street Capital Corporation.
To qualify as a BDC, companies must be registered in compliance with Section 54 of the Investment Company Act of 1940. A major difference between a BDC and a venture capital fund is that BDCs allow smaller, non-accredited investors to invest in startup companies. Some of the reasons why BDCs have become popular is that they provide permanent capital to their management, allow investments by the general public and use mezzanine financing opportunities.
There are quite a few publicly traded BDCs and many of them are listed on this site in the section labeled "Business Development Companies" which can be found in the Investing drop down menu above or by clicking here. While there are many great companies listed there and I own stock in a number of these companies, two of my favorites are Ares Capital Corporation and Main Street Capital Corporation.
Ares Capital Corporation
 Ares Capital Corporation (ARCC) specializes in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. The fund typically invests between $20 million and $200 million and a maximum of $400 million in companies with an EBITDA between $10 million and $250 million. It makes debt investments between $10 million and $100 million The fund invests through revolvers, first lien loans, warrants, unitranche structures, second lien loans, mezzanine debt, private high yield, junior capital, subordinated debt, and non-control preferred and common equity. The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically considers the purchase of stressed and discounted debt positions. The fund prefers to be an agent and/or lead the transactions in which it invests. The fund also seeks board representation in its portfolio companies. (Daily Chart) (Weekly Chart) | 18 October Price $15.91 1yr Target $18.40 Analysts 13 1yr Cap Gain 15.65% Dividend $1.52 Yield 9.55% 1yr Set Tot Return 25.20% Market Cap $5.00 Bil Beta 1.01 EPS (ttm) $1.87 Payout Ratio 81.28% EPS next yr $1.56 P/E 8.51 PEG 1.06 Forward P/E 10.17 Debt/Equity 0.68 ROA 6.50% ROE 11.20% ROI 5.50% Sales $945.20 Mil Income $534.50 Mil Profit Margin 56.50% |
Main Street Capital Corporation
 Main Street Capital Corporation (MAIN) is a business development company specializing in long- term equity, equity related, and debt investments in small and lower middle market companies. The firm focuses on investments in warrants, PIK (Payment in Kind) interest, convertible securities, junior secured or unsecured, subordinated loans, private equity, venture debt, mezzanine investments, mature, mid venture, industry consolidation, later stage, late venture, emerging growth, management buyouts, ownership transitions, recapitalizations, strategic acquisitions, business expansion, growth financings, and other growth initiatives primarily for later stage businesses. It does not seek to invest in start-up companies or companies with speculative business plans. It seeks to invest in traditional or basic businesses. The firm primarily invests in companies based in the Southern, South Central, and Southwestern regions of the United States but also considers other domestic investment opportunities. It invests between $2 million and $15 million in companies with revenues between $5 million and $300 million, enterprise values between $3 million and $50 million, and EBITDA between $1 million and $20 million. The firm seeks to charge a fixed interest rate between 12 percent and 14 percent, payable in cash, in case of its mezzanine loan investments. The firm typically invests in the form of term debt with equity participation and/or direct equity investments. It prefers to maintain fully diluted equity positions in its portfolio companies of 5 percent to 50 percent, and may have controlling interests in some instances. The firm also co-invests with other investment firms. It seeks to exit its debt investments through the repayment of the investment from internally generated cash flow and/or refinancing within a period of three to seven years. Main Street Capital Corporation was founded in 1997 and is based at Houston, Texas. (Daily Chart) (Weekly Chart) | 18 October Price $29.96 1yr Target $35.40 Analysts 5 1yr Cap Gain 18.15% Dividend $2.04 Yield 6.80% 1yr Set Tot Return 24.95% Market Cap $1.34 Bil Beta 0.85 EPS (ttm) $2.60 Payout Ratio 78.46% EPS next yr $2.40 P/E 11.52 PEG 1.65 Forward P/E 12.50 Debt/Equity 0.59 ROA 7.70% ROE 12.80% ROI 5.80% Sales $128.70 Mil Income $106.40 Mil Profit Margin 82.81% |
My Perspective
I have owned stock in both of these companies and will continue to monitor them and add to my positions on dips. While there may be BDCs listed on the exchanges that pay higher dividends or have a greater one year estimated capital gain, I still want to own these two. I'm very comfortable owning these shares and I've found them to be conservative growth companies that are also growing their dividends over time. I expect each of these to remain as core holdings in my accounts.
I have owned stock in both of these companies and will continue to monitor them and add to my positions on dips. While there may be BDCs listed on the exchanges that pay higher dividends or have a greater one year estimated capital gain, I still want to own these two. I'm very comfortable owning these shares and I've found them to be conservative growth companies that are also growing their dividends over time. I expect each of these to remain as core holdings in my accounts.
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