There used to be a time, during what some called the Great Recession, that American Capital, one of the oldest American based “business development companies” BDC, was struggling amid a stock market slump and a liquidity crunch. It wasn’t pretty.
Fast forward to today, American Capital’s woes from the past didn’t seem to deter any latecomer to the business development company game. More than 20 companies have filed to launch new American BDCs over the past 12 months, compared with a trickle of such filings in 2008 and 2009.
Investors are hungry for yield, and BDCs provide that thanks to their quarterly dividends.
“There are few alternatives to high-yield products, and BDCs provide an attractive option,” said Steven Boehm, a senior partner of law firm Sutherland Asbill & Brennan LLP that specializes in structuring and advising BDCs. “It’s a sexy product.”
Equally seductive is the prospect of having a permanent source of capital, a dream of private equity firms that dread the distraction and cost of raising private funds.
But the commonality of the new BDC hopefuls and their older brethren stops here. The younger crop looks a lot different. For one, it promises to use less leverage in their investment – a lesson well learned from American Capital’s problems. (American Capital itself has learned, too – Wilkus said recently that “it became evident during the recession that we were overleveraged, considering our asset mix,” and “we intend never to repeat that.”)
In another difference, many of the new BDCs plan to buy debt as opposed to equity in midmarket companies, which certainly would help their dividend-paying ability.
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