Business development companies are having a good year, with the S&P BDC Index leaping 12.8% as of Monday’s close.
The increase marks a comeback for the asset class, which is one of the private credit fields that giant money managers such as Blackstone have entered. The BDC measure this year is far ahead of the investment-grade Bloomberg Global Aggregate Total Return Index (up 1.4%) and only slightly trails the Credit Suisse High-Yield Index (13.2%)—although none of the fixed-income indexes can compare to stocks, as seen by the S&P 500’s 17.7% advance in 2023.
“This is a compelling time to be investing” in BDCs, said Ron Kantowitz, head of private credit at asset manager Invesco, in a video clip posted on LinkedIn. While acknowledging that risks abound nowadays, he argued that careful due diligence will allow investors to pick the best ones and “invest away from” less-worthy BDCs.
BDCs—closed-end investment companies—are run to invest in small and medium-sized privately held businesses and offer lush annual dividend yields, which S&P Dow Jones Indices place at 10.2%, far above the S&P 500’s 1.5% and junk bonds’ 8.3%.
As most BDCs use floating rates for the debt that dominates their portfolios, they have grown more and more attractive to yield-hungry investors. At this point, BDCs, along with other private debt offerings, have low default rates. As of year-end 2022, law firm Proskauer Rose, which specializes in legal advice to private credit, reported that the BDC sector had just a 1.04% default rate.
Public BDCs have ballooned, expanding to $200 billion in total assets in 2021 from $5 billion in 2002. Some big names, often affiliated with private equity titans, are in the publicly traded BDC space.
The leader in terms of assets is Ares Capital Corp. ($9.3 billion), followed by FS KKR Capital Corp. ($5 billion) and Owl Rock Capital ($4.8 billion). There also has been a surge in privately traded BDCs, with Blackstone Private Credit ($22 billion) in the lead.
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Tags: business development companies, Invesco, investment grade bonds, Junk Bonds, Private Credit, Private Equity, Proskauer, Ron Kantrowitz