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BDC Primer - Business Development Companies - What are BDCs? High Dividends Investments - YouTube
Channel: Learn to Invest - Investors Grow
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Hi I'm Jimmy in this video
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we're looking at the basics of
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business development companies or
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BDC is for short.
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We're going to run through how the
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dividends for BDC can be as high
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as they are.
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Then we're going to look quickly at
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two different BDC is to
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get an idea of what BDC
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tend to do then
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in the end we're going to look
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quickly at where business
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development companies could fit in
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our portfolio.
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Okay let's get start with the very
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basics. So what is a BDC
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a business development company is a
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publicly traded fund that
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is essentially like a private equity
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fund or a venture capital fund.
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So generally BDC is focused
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on the middle market
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companies.
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So middle market companies can
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broadly be defined as
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companies valued between somewhere
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between 100 million and a billion
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dollars.
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So basically a BDC invests
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in middle market companies perhaps
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they make a loan to that company and
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then collect interest payments or
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perhaps they buy a piece of that
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company by taking a piece of
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equity or they become a shareholder.
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So for us investors this
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can be interesting because this
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allows us to invest essentially
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in a venture capital like structure
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except for this one is publicly
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traded and we can buy or sell
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it just like we would buy an ETF or
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read or a closed end fund.
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So let's look quickly at two
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examples.
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The first one is areas capital
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ticker symbol a BDC.
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And this actually brings us to the
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top reason why many people
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like investing in BDC is that's
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their dividend.
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So over the past 12 months a BDC
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has paid about a dollar 62 in
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dividends and given that their stock
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price is trading just short
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of nineteen dollars a share.
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Well that would give areas capital
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a dividend yield of more than eight
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and a half percent.
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How do they do this we ask.
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Well just like a real estate
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investment trust we've got a master
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limited partnerships business
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development companies don't pay
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corporate income taxes as long
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as they pay out the majority of
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their profits as distributions
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to shareholders.
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So this helps keep their dividend
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much larger than the typical
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company. OK.
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Let's look at what a BDC actually
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does from an investment perspective.
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So this one slide I took out of an
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investor presentation and I know
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there's a lot going on here.
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But generally speaking this does
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a good job of laying out what
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not just what areas does but also
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what Beatty sees in general tend to
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do. So let's break this one down a
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bit. So this top section here called
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products.
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Well this is what BDC offers
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to the companies that they invest
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in. So basically we can look
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as at a BDC as a bank
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or as somewhere between what we
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most normally might think of as a
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bank bank lending money
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and a venture capital company
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which typically invests in startups
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this lands somewhere in the middle
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of that BDC is a very similar
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except they do it for the middle
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market companies.
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OK. So we can really separate this
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into two different categories.
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The ones in the green box.
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Well this is where the BDC makes
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equity investments into the company.
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So essentially they're getting a
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piece of the stock of that company
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and then the other ones are mostly
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loans that the BDC is make.
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Now this is important because BDC
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is generally are going to be
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dominated by the loans that they
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make to companies.
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Then when we jump down to the next
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section well here this
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tells us generally what the company
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tends to do with the money that they
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get from BDC is either
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through a loan or through an
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investment of some sort.
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So here we could see that a lot of
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this revolves around the growth of
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the company. Maybe it's an
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acquisition that the company wants
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to make or restructuring
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or maybe the companies look to
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looking to fund just its general
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growth.
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Either way it's a BDC that can often
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help fund this next level of
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growth and in return the
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company goes ahead and pays the BDC
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in an interest rate or fees
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or perhaps dividends if the BDC took
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an equity stake.
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Now if we're wondering why what
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types of companies BDC tend to
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invest and here's a pie chart
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once again from areas presentation
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and we could see that they're all
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spread out amongst a ton of
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different industries.
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Now that's true for areas but not
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true for everybody.
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So now jump over to another BDC
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and to get another aspect
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of what BDC might do.
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So the next one is the Apollo
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Investment Corporation ticker symbol
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a I envy now
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Apollo has paid forty five cents
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a quarter for the past four quarters
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giving us a total of a dollar 80
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given that they're trading at
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slightly less than sixteen dollars
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and 50 cents.
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Well that's a dividend yield close
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to eleven percent now wants to go to
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Apollo's Web site.
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This is on the front page.
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We could see that they have
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investments of two point six
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billion. Now this is significantly
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smaller than areas areas is one
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of the largest out there.
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So it's wide ranging.
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They also say that 71 percent
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of their loans are first tier
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debt which is a good thing
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tends to be a good thing as in
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theory they have first rights to
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collect.
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They also say they invest in one
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hundred twenty nine companies and
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ninety nine percent of their loans
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are floating rate loans.
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And this could usually be a good
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thing for BDC It's not just so
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we're all on the same page.
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A floating rate loan is
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when the bank when there is a
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benchmark rate of some sort.
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Maybe it's the 10 year treasury or
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lie board that's going away.
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Or maybe it's the prime rate.
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So basically they take a benchmark
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and they say OK.
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The benchmark is going to be the
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prime rate and we're going to add 3
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percent to that or 2 percent or
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whatever it is.
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And then the payments or the
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interest charge to the customer
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moves around based on where the
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underlying interest rate is.
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So either way as interest rates
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move up or down.
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Well in theory there could be some
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consistency to the profits.
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That's why Apollo would bring this
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element the first page.
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Now this could also lead in
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theory to consistency of dividends.
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Now I happen to have looked at the
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history of Apollo and they've
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actually dropped their dividend a
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few times.
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So I just want to bring out that
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this is not intended to be an
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analysis of Apollo or areas
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capital. I'm just using these as
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examples to illustrate how BDC
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sees work in general.
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If we want to see a more thorough
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analysis on either one of these
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BD Cs or perhaps a different BDC
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altogether please let me know in
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the comments below and we could do a
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more thorough analysis of their
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holdings their value things along
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those lines.
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OK. So to summarize BDC
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sees are an investment
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that traditionally landed
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somewhere between typical stocks
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and bonds although a bit closer
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to the bond side and happy to trade
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like stocks.
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That being said I do think that
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it would make sense if this was
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going to be a piece of our
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portfolio.
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I think that it would make sense to
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diversify with at least a couple
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holdings but perhaps we want
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to be involved in a particular
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sector maybe the technology sector.
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Well a BDC like Hercules Capital
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ticker symbol HTGC
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well they might be something we'd be
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interested in because unlike areas
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that's all spread out Hercules tends
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to focus mostly on technology
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companies. Then another thing to
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consider with BDC in general is we
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need to watch the feeds now these
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fees aren't directly comparable to
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the fees of an ETF or a mutual fund
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but generally management fees
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are something that is included that
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comes out of revenue and depending
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on whether or not the BDC is
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internally managed or externally
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managed could the
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the fees they're going to be there.
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And we it's something that we're
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going to want to identify and see
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what we think of their overall
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profitability and returns things
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like that. Now when it comes to
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valuing of BDC
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I've seen price to book use
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I've seen some analysts target
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a what they believed to be
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a sustainable dividend rate and then
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base the value off of that dividend
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rate. So that is the basics of BDCs
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and basically a
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BDC is a something
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that would give us access to the
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middle market lending to the middle
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market.
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The question is do you think we
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should do a deeper dive into any
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of these BDC or maybe
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we can create a top three list or
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something like that that could be
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interesting let me know what you
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think in the comments below.
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Do you think that access to this
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middle market lending area with
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high dividend yields but
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somewhat volatile movement in the
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stock price do you think that's a
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good investment.
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Let me know what you think in the
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comments below.
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If you haven't done so yet please
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hit the subscribe button.
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Thank you so much for stick with me
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all the way into the video.
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I've seen the next video.
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Thanks.
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