American Capital Ltd. (ACAS), Main Street Capital Corporation (MAIN): If Yields Go up, Are BDCs Done For?

Ares Capital Corporation (NASDAQ:ARCC) pursues a different strategy, focusing on first lien senior debt with a relatively low equity position. The capital allocation decision can materially impact returns. American Capital Ltd. (NASDAQ:ACAS)’s portfolio, for instance, will have to rely on equity appreciation to deliver excellent returns to shareholders. Ares, on the other hand, tends to lend out first lien senior debt, making it relatively safer in the event of bankruptcy and other adverse events. All BDC portfolios are not created equal.

Putting it all together

There’s a lot to like about the BDC business model, as it pursues a niche business, is given a solid cost advantage by the government, and it gives regular investors the chance to invest in a private equity-like situation. However, these businesses aren’t risk-free, and Valuentum will examine the risks of BDCs in a follow-up piece.

RJ Towner has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article If Yields Go up, Are BDCs Done For? originally appeared on Fool.com.

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