Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Main Street Capital Corporation (MAIN), American Capital Ltd. (ACAS), Prospect Capital Corporation (PSEC): Why You Shouldn’t Ignore This Industry

Page 1 of 2

Private equity may seem like an asset class only for the rich and famous, but a fast-growing industry gives you a chance to stake your claim in private companies.

Meet the business development company industry, a small subset of the financial industry that deals with businesses too small for Wall Street.

Here are five reasons every investor should own a BDC.

1. True growth stocks are dead

The truly great growth stocks are no more. Sure, we have high fliers like LinkedIn or Facebook, but these examples are few and far between as smaller companies stay private.

Over time, a combination of regulation and takeovers have kept good companies off the public market. Smaller firms are waiting longer to come out with an IPO — Facebook waited until it earned a $100 billion valuation to list publicly — which keeps many growth stocks out of investors’ portfolios. In 2000, there were more than 6,400 stocks in the Wilshire 5000 index. Today there are fewer than 3,700.

Source: Wilshire Associates.

BDCs are one of the few ways investors can invest in smaller companies with market caps of less than $100 million. It often doesn’t make sense to list on a national exchange for businesses that size or smaller.

2. Smaller companies outperform

History provides evidence that the smallest companies outperform larger companies. That outperformance boils down to the reality that small companies have much more room to grow, and such companies are generally underowned and undercovered by Wall Street’s best and brightest.

Several BDCs offer exposure to smaller companies. Main Street Capital Corporation (NYSE:MAIN) holds 20% of its portfolio in equity positions in lower middle-market companies — businesses that have revenue of less than $150 million per year. These smaller middle-market companies offer tremendous growth opportunity as well as income potential, as 75% of its equity investments are currently paying dividends.

Likewise, American Capital Ltd. (NASDAQ:ACAS) holds 35% of its portfolio in middle-market equity investments. Another 18% is dedicated to preferred stock investments, making it one of the most equity-heavy BDCs on the market.

3. Market indexes ignore them

Financial stocks make up nearly one-sixth of the S&P 500 index but there isn’t a single BDC in the index. Unless you seek out BDCs to hold in your portfolio, you likely don’t own one.

Source: State Street Global Advisors data on SPDR S&P 500 ETF.

4. Superb yields

The best way to think about a BDC is to think of a bank that doesn’t have an internal growth goal. BDCs have to distribute at least 90% of their annual income to shareholders, which often means dividend yields of 10% or more.

Generally speaking, banks are in a very similar business, but they don’t distribute a majority of income to their shareholders — not even close. Established and slower-growing major national banks like JPMorgan Chase and Citigroup paid out only 21.4% and 1% of their income as dividends in the latest 12-month period, respectively.

BDC Prospect Capital Corporation (NASDAQ:PSEC) paid out 86.4% of investment income in monthly dividends during its most recent quarter, with plans to step up its dividends in every month through March 2014, as it has since 2009.

5. Active managers on your side

Active management doesn’t get the respect it deserves. In small corners of the market — think junk bonds or microcaps — an active manager can much more easily outperform the asset class as a whole.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!