Saturday, September 01, 2012

10% Yields on Business Development Corporations and Private Equity Funds

Private equity companies, venture capital funds, and business development corporations are usually grouped together in the same investment category. This is mainly due to the fact that these investment vehicles allow investors to get in on the ground floor of private companies before they go public. Once the companies in the portfolios have an IPO, the returns can be substantial.

Private equity firms invest in the equity and often the debt of private companies. Usually private equity investments are available for accredited investors only, but fortunately, there are several private equity funds which are publicly traded that anyone can buy.

A Business Development Corporation, also known as a Business Development Company or BDC, is similar to a publicly traded private equity fund. Many private equity companies are registered as BDCs for tax advantages, generally paying no corporate income tax because at least 90 percent of their income, profits, and capital gains are paid out as taxable dividends to investors.

If you are wondering how common these types of investments are, recently updated its list of the publicly traded Business Development Corporations and Private Equity Companies, which lists over 25 of them, most of which, income investors will be happy to hear, pay dividends. The yields range from 2.9% to in excess of 12%.

One example is BlackRock Kelso Capital Corporation (BKCC), a private equity firm founded in 2005 specializing in middle market companies, with EBITDA or operating cash flow between $10 million and $50 million. The firm invests in such companies as American SportWorks, Fitness Together, Grocery Outlet, Heartland Automotive Services, InterMedia Outdoors, Pre-Paid Legal Services, Renaissance Learning, and Sentry Security Systems. The stock trades at 11.8 times trailing earnings and 9.6 times forward earnings. It sports a yield of 10.6% and pays its dividends quarterly.

TICC Capital (TICC) is a BDC that has been paying dividends quarterly since 2004, and yields 11.1%. The stock has a price to earnings ratio of 14.3 and a forward PE of 8.7. The company invests in secured and unsecured senior debt, subordinated debt, junior subordinated debt, preferred stock, and common stock of both private and public companies, specializing in technology, media, telecommunications, and medical equipment. The company has invested in NetQuote, Inc., the web-based portal for insurance companies and consumers, StayOnline, Inc. a provider of wireless high-speed Internet access solutions for the lodging industry, and Ai Squared, a manufacturer of assistive technology software which makes the screen magnification program ZoomText.

PennantPark Investment (PNNT) is a business development company that yields 10.3%, and has been paying quarterly dividends since June of 2007. The company invests between $10 million and $50 million in each of its portfolio companies, holding mezzanine debt, senior secured loans, and equity investments. The stock trades at 9.2 times forward earnings. PennantPark invests in such companies as the hot tub and spa manufacturer Jacuzzi Brands Corp., Learning Care Group, Inc. which is owner of one of the largest early education and child care providers La Petite Academy, and VPSI, the world's largest vanpool service provider.

To see a list of over 25 high yield business development companies and private equity firms, which can be downloaded, sorted, and updated, you may want to obtain it at Several of these companies pay dividends monthly and more than a dozen have yields above 8%.

Disclosure: Author did not own any of the above at the time the article was written.


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