Best BDC stocks to watch in 2021
BDCs – or business development companies – are about to have a moment in the sun, as the US economy reopens and business growth resumes. Here’s how to get involved in this resurgence.
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BDC companies: what you need to know
What is a BDC?
Business development companies (BDCs) seek out opportunities to invest in distressed companies or small- and medium-sized enterprises (SMEs) with growth potential. Once a suitable company has been identified, the BDC will make a direct equity or debt investment in the business.
Most BDCs will also share their expertise and connections to help rescue the company from financial distress, or to aid its growth. Unlike venture capital or private equity firms, which are often pitched exclusively to high net worth investors, listed BDCs allow all investors to get involved.
BDCs are a uniquely American invention – they were created by Congress in 1980 as a way of encouraging investment in small and growing companies in return for corporate tax breaks. As regulated investment companies, BDCs are legally obliged to distribute 90% of their profits among their shareholders, which makes them particularly attractive to income-seeking investors.
By law, BDCs must also invest at least 70% of their funds in US-based companies. For UK investors, a BDC investment can give access to the huge growth potential of US-based businesses, which are emerging from a unique economic downturn caused by the Covid-19 pandemic.
With thousands of businesses in need of financial support, there is an opportunity for BDCs to make huge profits. The best BDC stocks will already be in prime position to benefit from the reopening of the US and global economy.
How to trade or invest in BDC stocks
It’s easy for retail traders or investors to access BDC stocks and shares through our platform. Here are the differences between trading and investing:
- When you trade, you’re making short-term decisions in order to make quick gains in growing markets
- When you invest, you effectively take a long-term position in a company or fund in the hope that its value will rise over time
Follow these steps to trade or invest in BDC stocks:
- Choose whether to trade or invest
- Create an account or log in
- Identify your opportunity
- Carry out your own analysis and research
- Open and monitor your position
As a subsidiary of the global alternative investment manager Ares Management Corporation, Ares Capital has deep pockets and a vast network of business experts. This gives it a major advantage when it comes to working with private middle-market companies in need of a boost.
Ares Capital only invests in market-leading companies with a history of stable cash flows, competitive advantages, experienced management teams, and obvious growth prospects. Risk is managed via a strict due diligence process.
Since the beginning of the pandemic, Ares Capital’s stock value has been on a steady climb as it proved its ability to weather a downturn and fielded funding requests from a record number of businesses.
Golub Capital BDC
Golub Capital BDC is another long-standing BDC which has been trading for more than a decade. It makes investments of between $10 million and $75 million in middle-market companies which have backing from private equity firms. These investments typically take the form of first lien unitranche debt (where funding may be offered alongside multiple lenders) and other senior secured loans.
This focus on senior debt funding helps to reduce risk by ensuring that Golub Capital is the first to be repaid if the company fails. In March 2020, its stock price plummeted as the impact of the Covid-19 pandemic began to take shape. However, since then it has been trading at near record values.
Apollo Investment deals with much of the debt that is used to finance the deals and restructurings of its parent company – Apollo Global Management handles. It’s a well-staffed and well-funded BDC, which invests in middle-market companies, primarily through first lien secured debt instruments.
Unlike Ares and Golub, Apollo Investment has yet to see a post-Covid-19 boost, but this may be due to a few unfortunate holdings. For instance, the company has a 13% position in Merx Aviation, a global aircraft leasing company which has been underperforming due to the pandemic.
In its fourth quarter (Q4) financial report for 2020, chief executive officer (CEO) Howard Widra said that the company’s corporate lending portfolio was starting to recover from the unrealised losses incurred during March 2020. Widra added that given Apollo Investment’s newly reduced leverage, it has begun to make new investments again.
Why do people trade and invest in BDC stocks?
- BDC stocks offer easy access to the US corporate debt market
- By speculating on BDC stocks, traders and investors can benefit from the expected post-Covid-19 economic recovery
- Many BDC stocks allow retail traders and investors to tap the private equity market at an affordable price
- BDC shares typically pay generous dividends, making them popular with income investors
- As the US economy reopens, BDC stocks are expected to be net beneficiaries
BDC stocks summed up
- Business development companies provide direct funding to distressed and growth businesses in the US
- Anyone can take a position on a BDC by trading or investing in BDC stocks
- The Covid-19 pandemic has forced an economic slowdown – but as the US economy opens back up, a sharp recovery is expected
- It’s quick and easy to invest in BDC stocks and shares with us
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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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