In March 2015, Goldman Sachs launched the initial public offering (IPO) of its business development company (BDC), signaling a rise in the number of high-yield investments that will play out in the market. Although over 50 BDCs were already publicly traded before Goldman Sachs debuted its IPO, the notable financial services firm’s entry into the BDC arena helped reinforce and propel a growing trend toward bigger, more institutional managers becoming managers of BDCs.
According to a Cliffwater report, with Goldman Sachs’ IPO the total number of publicly traded BDCs rose to 52 with a combined market capitalization of approximately $32 billion, which is part of the total $1.8 trillion private debt market. Goldman Sachs’ BDC was worth approximately $707 million at the time.
BDCs are portfolios of private debt with yields typically ranging between 7% and 14%. There are two kinds of BDCs, those that are publicly traded and those that are not traded. Publicly traded BDCs tend to pay higher yields because their share price is typically not in sync with the net asset value of the private loans’ underlying portfolio. They are also beneficial for their liquidity. The 13 non-traded BDCs only pay money on a monthly or quarterly basis.
With such high returns, BDCs are quite appealing in a low-interest-rate environment such as the one the United States presently finds itself in. But because part of the debt that backs BDCs is of a floating nature, yields can rise as interest rates rise, making BDCs even more attractive. Moreover, especially when measured against the tremendous ups and downs of today’s emerging markets, BDCs have produced highly favorable results.
The downturn in the Chinese economy at the start of the year triggered the kind of volatility in emerging markets that has not been seen in decades. Ravi Ramamurti, Distinguished Professor of International Business and Strategy at Northeastern University, notes that we are presently experiencing the same levels of volatility we saw in the 1960s, 1970s, and 1980s. Additionally, the growth of the global economy is slower now than it was during this cycle a decade ago.
At the heart of the structural issue is emerging markets’ distinct vulnerability to China’s slowing economy. Up to now, countries such as Australia, Indonesia, and Korea relied on China’s debt-fueled investment and infrastructure spending to consume their commodity exports. For example, exports of iron ore to China accounted for 34% of all of Australia’s worldwide exports and 6% of its gross domestic product (GDP) in 2015. As China transitions to a consumer-oriented economy marked by a slower growth rate, its demand for industrial materials has decreased and caused the prices of such commodities to dive. This decline and continued unpredictability in emerging markets have shown a marked need for a new business model — like a BDC.
Even as 2016 has thus far been defined as a global slowdown, BDCs have fared extremely well. In June 2016, the top five financial sector money makers were BDCs. As of June 17, 2016, 10 BDCs reported yields between a minimum of 10%, the standard maximum yield, and 17%, which far exceeds the typical maximum. Moreover, analysts project that yearly gains for the top 10 BDCs will range between 21.2% and 54.8%.
As mentioned in my previous article on why BDCs are leading the pack, (and why CEOs need to consider them) only a few have lauded their substantive value before now. Not keeping current with BDCs’ performance, and not having them in your firm’s tool belt can be, according to CFO Henri Steenkamp, CFO of Saratoga, a financial detriment to your firm.
The business development company sector is a fast evolving facet of the financial marketplace. It is imperative that you stay abreast of the news, or you could fall behind. As a member of the board, and CFOs specifically, you can’t miss the latest comings and goings. If you do, you are not only disserving yourself […].
The good news for managers and investors is that this highly visible and noteworthy BDC launch last year will continue to produce more long overdue interest which may in turn spur an economic upturn. Goldman Sachs brings attention to a space that looks likely to keep growing with many positive results.