How Your BDC Investment Helps Strengthen the Economy
The days of investing in mutual funds and other traditional retirement options aren’t quite what they used to be. And today there are so many more options. Traditional options should not be forgotten, but investing in a business development company (BDC) is now a viable option for those seeking increased returns with manageable risk. Like any investment, risk certainly is part of the plunge, but a viable BDC provides investors with additional security by maintaining a diverse portfolio that spans industries and regions of the world.
For an idea of diversity within a BDC’s portfolio, take a look at the graph below from my company, Saratoga Investment Corp.’s, recent Q3 FY 16 earnings report:
Saratoga Investment Corp.’s, recent Q3 FY 16 earnings report
Such diversification, as well as our singular focus on increasing the quality and size of our asset base with the ultimate purpose of building Saratoga into a best-in-class BDC, generates meaningful returns for our shareholders. In doing so, Saratoga this past quarter continued its upward momentum, including a return on equity of 10.8% for Q3 and 12.9% YTD, beating industry average of 4.3%. Additionally, we declared a new increased dividend of $0.40 per share. This continued an increase in quarterly dividends, more than doubling our quarterly dividends in the past 12 months.
BDCs Help You Help Smaller Businesses
Looking at the industry as a whole, BDCs can often be safer than banks during a financial downturn. Banks leverage assets at anywhere between 8 to 10 times over, whereas BDCs are limited to 2 times leverage. Banks today have more equity as a percentage of assets than they have had in over 20 years. Since banks are less willing to invest in a small to mid-sized companies, BDCs provide an excellent opportunity for investors. In doing so, this opens up the proverbial highway for your BDC investment to grow the economy. And because of the fact that BDCs are public companies filing public financial statements (Form 10-Qs and Form 10-Ks with the SEC), there is significant disclosure of what the BDC has invested in – thus providing you with full clarity into what you are investing in.
According to U.S. Census Bureau data, “firms with fewer than 500 workers accounted for 99.7 percent of those businesses, and businesses with less than 20 workers made up 89.8 percent.” In short, small to medium-sized businesses serve as the dominant engines for the economy by providing necessary jobs across the country. To have a thriving economy, businesses need to expand and they need cash to do so. With your BDC investment, more companies can gain access to funds, expanding the company while creating more payroll flexibility to hire more workers–if that aligns with the investment plan between the company and the BDC.
Invest Like a Venture Capitalist, Sort Of
BDCs are similar in vein to venture capitalists and other non-banking equity streams. While both work closely with their portfolio companies, BDCs allow for investors of any financial stature to participate in the market. The increased investment support adds value to small and mid-size businesses, as they are given greater chances of success. If that success comes to fruition, the economy benefits as well. Consider it an extreme case of a mutually beneficial investment, if you will.
BDC investment nurtures entrepreneurship by helping growing companies enter positive cash flow and providing managerial expertise to those in need. As demand increases in this sector, new opportunities will continue to open up. These opportunities, if followed successfully, will contribute to the growth of and strengthening of an economy dependent on the success of smaller businesses.
Like any investment, the more research you do and the more time you take to understand the significance of investing in BDCs, the better your investment portfolio will be. As with any form of investment, there are no shortcuts and it is always advised to do your homework if you want to be successful. Regardless the investment path you choose, the investor must remain vigilant in managing risk and any potential liability. Even if BDCs look like the best option, an investment in a flawed company is a surefire bad bet, and no help on the economy as a whole.
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