Thursday, October 28, 2010

Venture Capital Investment with a 7.2% Yield

Private equity companies take large positions in private companies, and sometimes own the entire companies. Often, these companies are referred to as venture capital firms. Sometimes, the only way to invest in a 'hot' company is through a private equity company. As an example, many years ago, I invested in a company called the Nautilus Fund, which happened to own an equity position in some small privately owned technology company with the odd name of Apple (AAPL).

At the time, I was using an Apple II computer with the Visicalc spreadsheet program. I couldn't believe that calculations could be done so easily on a small machine and then printed out. I was working for an investment firm at the time and wanted to invest in this little Apple company, but unfortunately, it wasn't publicly traded. Fortunately, I read in a Forbes article that a publicly traded venture capital company called the Nautilus Fund, had an equity interest in Apple. So to make a long story short, I bought some Nautilus for myself and some relatives, Apple went public, and Apple shares were spun off to the Nautilus shareholders.

Of course, investing in private equity can be very risky, which is why most private private equity firms are private. The few publicly traded ones gives smaller investors an opportunity to participate in this potentially very lucrative investment arena. To cut down on risk, many investors seek out the ones that invest in debt of private companies in addition to equity, so that income can be generated for the shareholders.

An example is Gladstone Capital Corporation (GLAD), which is structured as a closed-end management investment company. The company diversifies its portfolio by investing in both equity and debt securities, and allocating funds towards both small and medium-sized private companies. Gladstone, which has paid monthly dividends for many years, generates a yield of 7.2%. The stock trades at 12.8 times forward earnings and sells for about 3.5% below book value.

Gladstone provides financing for a very diverse portfolio of companies across many industries, including Country Club Enterprises which is the sole distributor of Club Car and E-Z-Go golf carts in the northeast U.S., Legend Communications of Wyoming which is the largest radio operator in their region, Reliable Biopharmaceutical which is a manufacturer of high value advanced pharmaceutical and biochemical products for the generic injectable pharmaceutical industry, Cavert Wire which is the largest supplier of non-galvanized bailing wire in the country, Newhall Laboratories which markets La Bella™, Golden Sun™, and Rebound™ personal care products, B-Dry which is the oldest basement waterproofer in the U.S., Access Television Network which distributes infomercials and other paid programming through about 300 cable television systems, and Westlake Hardware which is the largest member of the ACE Hardware Corporation buying cooperative.

Gladstone's earning announcement will be held November 22.

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Disclosure: Author owns AAPL at the time the article is written.


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