{"id":36888,"date":"2023-11-24T11:35:03","date_gmt":"2023-11-24T11:35:03","guid":{"rendered":"https:\/\/microloannexus.com\/investing\/how-to-get-double-digit-yields-by-investing-in-private-credit\/"},"modified":"2023-11-24T11:35:04","modified_gmt":"2023-11-24T11:35:04","slug":"how-to-get-double-digit-yields-by-investing-in-private-credit","status":"publish","type":"post","link":"https:\/\/microloannexus.com\/?p=36888","title":{"rendered":"How To Get Double Digit Yields By Investing In Private Credit"},"content":{"rendered":"
\n

Business development companies offer great dividends, plus bonuses to income hungry investors. Tempting, but look closely before you leap.<\/h2>\n

By <\/sub>Hank Tucker<\/sub>, Forbes Staff<\/sub><\/h4>\n

W<\/abbr><\/em>ith interest rates<\/strong> at heights not seen in nearly two decades and traditional len-ders still shell-shocked from this past spring\u2019s bank runs, private credit, or nonbank direct lending, is booming on Wall Street. Yield-chasing institutions have poured into the sector, which now amounts to $1.5 trillion globally. But pension funds, endowments and other big players need not be the only investors feasting on high yields.<\/p>\n

A great way retail investors can partake in private credit\u2019s spoils is by buying the stocks of business development com-panies (BDCs). These outfits are required to lend to small or medium-sized businesses, which usually don\u2019t have access to public debt markets. There are more than 130 BDCs, according to the Small Business Investor Alliance. The largest is the $48 billion Blackstone Private Credit Fund (BCRED)<\/strong>, which yields about 10% currently. That fund is sold exclusively through financial advisors and limits redemptions at book value to once per quarter. But Blackstone and every other major private equity firm\u2014including KKR and Apollo\u2014plus credit specialists like Ares Management and Blue Owl also offer publicly traded BDCs with daily liquidity. These funds are currently offering annualized yields from about 6% to more than 16%.<\/p>\n

Blue-Chip BDCs <\/strong><\/h2>\n

These purveyors of private credit have track records of strong credit performance and dependable returns without taking on too much risk.<\/h4>\n

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Most BDCs are required to pay out 90% of their earnings to investors as dividends, and the majority of loans in a typical BDC\u2019s portfolio are floating-rate, giving them a measure of protection against interest rate swings. Many BDCs, such as Blue Owl Capital (OBDC)<\/strong>, which has $12.9 billion in assets, have raised their dividends this year and are also throwing in supplemental or \u201cbonus\u201d dividends, promising to pay out 50% of any excess earnings beyond the base amount. The bonuses reward investors during good times but also let BDCs avoid dividend cuts later when interest rates retreat. OBDC\u2019s base dividend for the third quarter was raised to 35 cents per share and came with an 8-cent bonus, implying an annualized dividend of $1.72 or a 12% yield at its current price of $14.38. OBDC trades at a 7% discount to its book or net asset value.<\/p>\n

\u201cYou\u2019re earning equity-like returns in a defensive portfolio of loans,\u201d crows Craig Packer, co-president of Blue Owl and CEO of OBDC, which has 83% of its portfolio in senior debt, the type that gets paid early in a bankruptcy. Blue Owl, which went public in 2019, had a 12.7% return on equity in the third quarter. It specializes in lending to software companies and noncyclical sectors like insurance brokers, which have consistent recurring revenue streams. Ares Capital (ARCC)<\/strong>, the largest publicly traded BDC with $21.9 billion in assets, has an 11.2% average six-year return on equity, though its stock trades at a 3% premium to book value.<\/p>\n

\u201cEinstein said after the atom bomb that it changed everything in the world except how men think. AI can change everything except how men think and behave.\u201d <\/strong><\/h3>\n

<\/strong>\u2014Warren Buffett<\/em><\/p>\n

Higher interest rates and a strong economy have meant happy days for BDC investors recently, but don\u2019t count on them lasting forever. The average return on equity since IPO of 28 BDCs tracked by Oppenheimer is just 7.4%. \u201cMany BDCs were annihilated during the financial crisis,\u201d notes Benjamin Nobel, cofounder of BDC-Investor.com. In fact, according to a recent report by Edward D. Jones, the average BDC swung from a 40% premium, just prior to the crisis, to a 70% discount by the end of 2008.<\/p>\n

\u201cIt\u2019s a very inefficient market because there are a lot of investors who just look at the dividend and assume that\u2019s what the BDC is going to earn, when in fact that\u2019s not the case,\u201d says Oppenheimer analyst Mitchel Penn. \u201cIf a BDC doesn\u2019t earn its dividend, it\u2019s returning capital.\u201d<\/p>\n

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Reliable performers Penn recommends in addition to Blue Owl and Ares are Golub Capital BDC (GBDC)<\/strong>, Oaktree Specialty Lending (OCSL)<\/strong> and Sixth Street Specialty Len-ding (TSLX)<\/strong>. Golub and Sixth Street are among a select few BDCs with more than 90% of their portfolios in first lien loans, meaning they\u2019re first in line to be repaid if a borrower defaults.<\/p>\n

Another important factor to consider is a BDC\u2019s debt-to-equity ratio, which was capped at 1:1 before the Small Business Credit Availability Act in 2018 upped that limit to 2:1. Still, most BDCs don\u2019t let debt get much higher than 1.3 times their book value\u2014Blue Owl has a 1.13x debt to equity ratio, and Ares\u2019 is 1.07. Any firm getting close to the 2x limit would be vulnera-ble to markdowns if a recession hits, which could require it to liquidate assets to raise cash.<\/p>\n

\u201cIf you look at Europe, they\u2019ve had no GDP growth for 16 or 17 years. . . Emerging economies are growing at high single digits, including Indonesia, Thailand, Vietnam and Cambodia. It\u2019s not just China anymore.\u201d <\/strong><\/h3>\n

\u2014Rajiv Jain<\/em><\/p>\n

\u201cIn order to get an investment grade rating from Moody\u2019s or S&P, you typically have to keep your leverage below 1.3 times,\u201d Penn says. \u201cBDCs really want to keep that rating so they have access to the bond market.\u201d<\/p>\n

Investors preferring diversification can buy their BDCs through the VanEck BDC Income ETF (BIZD)<\/strong>, which has $757 million in assets in a portfolio of 25 stocks. The three largest\u2014ARCC, OBDC and FS KKR Capital (KKR)<\/strong>\u2014make up 45% of assets. Total return year to date is 22%, including a 10.5% dividend yield, beating the S&P 500\u2019s 19%. But over the last decade its total return has averaged 6.8%, versus 11.7% for the S&P.<\/p>\n

Most institutions steer clear of BDCs because owning these private credit stocks would classify them as a fund of funds, requiring them to report \u201cacquired fund fees and expenses,\u201d or the indirect operating expenses and management fees charged by each BDC. VanEck\u2019s reported expense ratio is a sky-high 11.17% even though the ETF\u2019s own direct fees are only 0.42% of assets. This unwieldy reporting feature has caused major stock indices to shun BDCs, making them a rare corner of the market where small investors still rule.<\/p>\n

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<\/h4>\n

MORE FROM FORBES<\/strong><\/h4>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Business development companies offer great dividends, plus bonuses to income hungry investors. Tempting, but look closely before you leap. By Hank Tucker, Forbes Staff With interest rates at heights not seen in nearly two decades and traditional len-ders still shell-shocked from this past spring\u2019s bank runs, private credit, or nonbank direct lending, is booming on<\/p>\n","protected":false},"author":1,"featured_media":36889,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[49],"tags":[],"class_list":{"0":"post-36888","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-investing"},"yoast_head":"\nHow To Get Double Digit Yields By Investing In Private Credit | Micro Loan Nexus<\/title>\n<meta name=\"description\" content=\"Business development companies offer great dividends, plus bonuses to income hungry investors. 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