Goldman Sachs Group may be getting bullish on the business development company space as it becomes the first investment bank to back a BDC. Investors can also access the area through broad BDC-related exchange traded products.
For instance, investors can look at the exchange traded fund option, the Market Vectors BDC Income ETF (NYSEArca: BIZD). Additionally, the exchange traded note UBS E-TRACS Wells Fargo Business Development Index ETN (NYSEArca: BDCS) and the leveraged UBS E-TRACS 2x Wells Fargo Business Development Company Index ETN (NYSEArca: BDCL) also provide exposure to BDCs. [BDC ETFs for a Growing Economy, Attractive Yields]
Year-to-date, BIZD rose 3.4%, BDCS increased 4.1% and BDCL, which generates a leveraged 200% return, gained 7.3%.
Goldman Sachs Group recently pushed into the BDC space with its initial public offering of the Goldman Sachs BDC (GSBD), reports Jeff Benjamin for InvestmentNews.
“The Goldman offering is a significant continuation of a trend toward larger and more institutional managers becoming BDC managers,” Todd Owens, co-president of Fifth Street Asset Management, said in the InvestmentNews article. “It speaks to the growth of the BDC space. I think you’ll see across the entire BDC industry, players will get larger, more sophisticated, and more institutionally run.”
Brian Mitts, chief operations officer at NexPoint Advisors, argues that the Goldman BDC launch could will be seen as a “bellwether move” that could bring greater attention and legitimacy to the space.
Business development companies, or BDCs, are closed-end investment companies created under the Investment Company Act of 1940 that invest in debt and equity of small public and privately held companies. The companies essentially help fund small $5 million to $100 million businesses. Ever since the financial crisis, regulators have clamped down on traditional lenders and made it harder for businesses to access public capital.
“That is forcing businesses into the shadow banking areas” such as BDCs, Mitts added.
Since the debt is typically senior secured and set to float with interest rate benchmarks, there is diminished rate risk. When the Fed raises rates, BDC loan interest rates pegged to the London Interbank Offered Rate, or LIBOR, will also rise. However, Mitts believes we would need an 80-basis point rise in LIBOR before BDCs benefit.
Furthermore, BDCs offer attractive income opportunities since they are required to pay out 90% of income in form of dividends. For instance, BIZD has a 8.17% 12-month yield, BDCS has a 8.01% 12-month yield and BDCL has a 18.15% 12-month yield.
For more information on BDCs, visit our business development companies category.
Max Chen contributed to this article.