{"id":640757,"date":"2023-04-23T20:13:21","date_gmt":"2023-04-24T01:13:21","guid":{"rendered":"https:\/\/news.sellorbuyhomefast.com\/index.php\/2023\/04\/23\/how-to-invest-like-private-equity-yields-up-to-13\/"},"modified":"2023-04-23T20:13:21","modified_gmt":"2023-04-24T01:13:21","slug":"how-to-invest-like-private-equity-yields-up-to-13","status":"publish","type":"post","link":"https:\/\/newsycanuse.com\/index.php\/2023\/04\/23\/how-to-invest-like-private-equity-yields-up-to-13\/","title":{"rendered":"How To Invest Like Private Equity (Yields Up To 13%)"},"content":{"rendered":"
\n
<\/p>\n

Isometric businessman selling ideas to client standing near suitcase full of banknotes, businessman … [+]<\/span> trying to convince client to buy his creative light bulb, creativity and marketing.<\/span><\/p>\n

<\/fbs-accordion>getty<\/small><\/figcaption><\/figure>\n

Private equity (PE) is a rich guy and gal favorite. PE firms find deals and deliver outsized dividends.<\/p>\n

They don\u2019t like dealing with common folk. So, PE shops typically set a minimum of a few hundred thousand dollars or so to invest.<\/p>\n

But we contrarians have a better way! By tapping BDCs\u2014or business development companies\u2014we can toss as little as $20 into a PE payer.<\/p>\n

Better yet, we can secure yields between 8.5% and 13.1%. We\u2019ll discuss three examples today. Including one that is trading below<\/em> book value!<\/p>\n

If you\u2019ve never heard of business development companies (BDCs), you\u2019re not alone. There are only a few dozen publicly traded BDCs, and even the largest one would be a minnow in the S&P 500.<\/p>\n

BDCs, which were created by Congress a few decades ago, provide much-needed capital to companies that you and I could never invest in otherwise. Each BDC usually invests in dozens to hundreds of these companies at any given time, making them de facto<\/em> private equity specialists.<\/p>\n

But what I love most about business development companies are their gargantuan dividends\u2014dividends that are required by their very structure.<\/p>\n

Like REITs, BDCs must pay out at least 90% of their taxable income as dividends, though they have much higher horsepower as a group than REITs\u2014and most other asset classes, for that matter:<\/p>\n

<\/p>\n

On Yield Alone, It\u2019s Hard to Beat BDCs<\/p>\n

<\/fbs-accordion>Contrarian Outlook<\/small><\/figcaption><\/figure>\n

But super-powered double-digit yields are rarely super-safe as well. In fact, BDCs as a group<\/em> can be a dog, which is why you should avoid investing in them through diversified funds. Instead, you need to find the few picks of the litter\u2014and avoid the rest at all costs.<\/p>\n

Here are three\u2014yielding an astounding 8.5% to 13.1%\u2014that exemplify BDCs\u2019 highs and<\/em> lows.<\/p>\n

Main Street Capital (MAIN)<\/strong><\/p>\n

Dividend Yield:<\/strong> 8.5%<\/p>\n

Main Street Capital (MAIN)<\/strong> is as much of a blue-chip stock as the BDC industry has.<\/p>\n

This $3 billion business development company provides debt and equity capital solutions to lower-middle-market companies, and debt financing (primarily floating-rate first lien senior secured debt) to middle-market firms.<\/p>\n

MAIN\u2019s typical target company generates annual revenues of between $10 million and $150 million, and roughly $3 million to $20 million in EBITDA. Currently, its portfolio is made up of 194 companies, with the largest one representing just 3.4% of total investment income. And from an industry perspective, you couldn\u2019t ask for more diversification:<\/p>\n

<\/p>\n

Main Street Capital Q4 2022 investor presentation<\/p>\n

<\/fbs-accordion>Main Street Capital<\/small><\/figcaption><\/figure>\n

Included in these companies is MSC Adviser\u2014the company\u2019s external investment advisor, which has been steadily contributing more to the BDC\u2019s results over the past few years.<\/p>\n

Main Street is one of the best operators in the space, and its Q4 2022 merely added to its track record. Net investment income (NII) per share soared past estimates, return on equity was north of 20%, and distributable NII per share was 56% more than what it needed to fund its monthly dividends<\/a>.<\/p>\n

Speaking of the dividend: Not only is MAIN a monthly payer, but in a nod to fiscal responsibility, it also utilizes quarterly special distributions<\/a> that ebb and flow as income allows. As a result, its most recent special distribution was 17.5 cents\u201475% better than its past two 10-cent top-ups. The yield on its monthly is 6.8% right now; the special annualizes out to another 1.7%.<\/p>\n

MAIN seemingly always flies one massive red flag, however: its valuation. It\u2019s the most expensive BDC on the market, and by a comfortable margin, at 1.5 times its net asset value. Obviously, as you can see, MAIN has been able to outperform long-term despite this, but the valuation has seemingly put a cap on shares over the past few years.<\/p>\n

Gladstone Capital (GLAD)<\/strong><\/p>\n

Dividend Yield: <\/strong>10.0%<\/p>\n

A more reasonably priced BDC is Gladstone Capital (GLAD)<\/strong>, which invests in lower middle market businesses.<\/p>\n

Gladstone Capital is just one of several companies in the Gladstone \u201cfamily\u201d of investment acronyms\u2014a group that also includes fellow BDC Gladstone Investment Corporation (GAIN)<\/strong>, as well as real estate investment trusts (REITs) Gladstone Land (LAND)<\/strong> and Gladstone Commercial Corporation (GOOD)<\/strong>.<\/p>\n

This particular Gladstone uses everything from revolving loans and senior term loans to unitranche loans and even minority equity to provide capital to companies with $20 million to $150 million in annual revenues, $3 million to $25 million in EBITDA, limited market and\/or technology risk, and the potential to expand cash flow.<\/p>\n

Gladstone Capital features a much smaller portfolio than Main Street, at just 50 companies spread across 15 different industries. But overall, it has a defensive stance, with healthcare, aerospace, and education among its largest industry concentrations.<\/p>\n

<\/p>\n

Gladstone Capital Q4 2022 investor presentation<\/p>\n

<\/fbs-accordion>Gladstone<\/small><\/figcaption><\/figure>\n

Portfolio companies range from antenna manufacturer Antenna Research Associates to residential repair specialist Fix-It Group to artisanal ice cream company Salt & Straw.<\/p>\n

GLAD\u2019s investments are predominantly debt-based, and 90% of those investments are floating-rate in nature, so higher interest rates have been more help than harm. Meanwhile, Gladstone offers a sturdy balance sheet, and a generous management team that has shared the wealth via four hikes to the monthly dividend since the start of 2022.<\/p>\n

At 1.05 times NAV, Gladstone\u2019s shares aren\u2019t exactly a steal. But they\u2019re just a little more than fairly valued, and at the lower end of their historical range.<\/p>\n

Goldman Sachs BDC (GSBD)<\/strong><\/p>\n

Dividend Yield:<\/strong> 13.1%<\/p>\n

It\u2019s hard to think of many BDCs that have an advantage quite like Goldman Sachs BDC (GSBD)<\/strong>:<\/p>\n

\u201cWe are able to draw upon the vast resources of Goldman Sachs to assist in the evaluation of potential investment opportunities and to provide a range of value-added services to our portfolio companies.\u201d<\/em><\/p>\n

And yet \u2026 the stock lags its peers.<\/p>\n

It\u2019s hard to ignore that screaming 13% yield, though, and a slight discount to NAV, so let\u2019s see if GSBD is just waiting to pounce.<\/p>\n

This band of some of Wall Street\u2019s finest typically invests anywhere between $25 million to $75 million in U.S. middle market companies with EBITDA of between $5 million and $75 million annually, and it\u2019s happy to source partners for bigger deals.<\/p>\n

GSBD\u2019s current portfolio includes 134 companies, spread across industries including software, financial services, healthcare and professional services. The firm\u2019s investments are overwhelmingly loaded up on first- and second-lien debt, which have extremely low default probability.<\/p>\n

But there are some noteworthy cracks. Debt-to-equity remains above company targets. Non-accruals (typically, companies that haven\u2019t paid in 90 days) were at 2.1% at amortized cost, including two new portfolio companies placed on non-accrual last quarter. Growth has been intermittent at best over the past few years. And dividends do all<\/em> of the talking\u2014a five-year total return of just less than 20% belies a nearly 30% share-price decline in the same time.<\/p>\n

Brett Owens is chief investment strategist for <\/em>Contrarian Outlook<\/em><\/a>. For more great income ideas, get your free copy his latest special report: <\/em>Your Early Retirement Portfolio: Huge Dividends\u2014Every Month\u2014Forever<\/a>.<\/p>\n

Disclosure: none<\/em><\/p>\n<\/div>\n

Read More<\/a>
\n Brett Owens<\/p>\n","protected":false},"excerpt":{"rendered":"

Isometric businessman selling ideas to client standing near suitcase full of banknotes, businessman … [+] trying to convince client to buy his creative light bulb, creativity and marketing.getty Private equity (PE) is a rich guy and gal favorite. PE firms find deals and deliver outsized dividends. They don\u2019t like dealing with common folk. So, PE<\/p>\n","protected":false},"author":1,"featured_media":640758,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[22252,255],"tags":[],"class_list":{"0":"post-640757","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-invest","8":"category-private"},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/posts\/640757","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/comments?post=640757"}],"version-history":[{"count":0,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/posts\/640757\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/media\/640758"}],"wp:attachment":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/media?parent=640757"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/categories?post=640757"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/tags?post=640757"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}