Two New BDC IPOs on the Way

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Includes: CODI, GBDC, PSEC, SUNS, TCRD
by: Nicholas Marshi

We noticed a very interesting news item on Reuters regarding plans for a new Business Development Company (“BDC”). Another “blue chip” financial company-this time private equity behemoth TPG Capital is planning to launch a public BDC.

Here’s an extract from the Reuters article:

“Private equity giant TPG Capital’s special situations investing team is registering as a business development company, it said in a filing on Friday, taking advantage of a gap in the market in providing capital to mid-market companies.

TPG Specialty Lending invests in loans to middle-market companies and also makes equity investments in companies, according to the filing.

Filing to be a business development company can bring the advantage of public liquidity and can also have tax advantages.

The Specialty Lending team is led by Co-Chief Investment Officers Alan Waxman and Joshua Easterly.

TPG said in a letter to investors last year that it hired Waxman, formerly a partner at Goldman Sachs (GS.N) specializing in distressed and asset-backed distressed markets, in order to build a debt investment team.

Waxman was the co-founder of the Goldman Sachs Specialty Lending Group and Easterly was the former co-head of the same group at Goldman.”

The article does not tell us too much about what niche the new TPG BDC will seek to serve. It’s unlikely to be the distressed market alone, as the number of opportunities in that area are rapidly diminishing as the Great Recession recedes in the distance.

A NEW BDC IPO JUST DAYS AWAY

Closer to the finish line is Medley Capital Corporation, which filed on January 5, 2011 for the right to sell 11 million shares of common stock. The IPO is on the calendar for the week of January 17th. Medley’s been kicking around since late spring 2010, but seems ready to go to market now. This new BDC’s strategy is known as its spelt out in the offering document and the new company is acquiring assets from its parent company. Here the strategy is to achieve 15% all-in returns by investing in debt and equity of middle market companies. Here’s a brief quote from the prospectus:

We will seek to deliver equity-like returns to our investors on investments with the risk profile of secured debt. Our private debt transactions aregenerally structured to combine elements of both equity and fixed-income investments.

We’re going to read the prospectus in detail and provide our initial summary of the new BDC shortly.

BDC INDUSTRY GROWING IN NUMBERS

Anyway, it seems like the BDC space continues to grow in numbers with no end in sight. Yes, we lost Allied Capital and Patriot Capital to acquisitions by Ares Capital and Prospect Capital respectively and Kayne Anderson Energy (“KED”) gave up its BDC status for portfolio management and tax reasons, but there have been numerous new players coming on the scene in the last 12 months, including Solar Capital (“SLRC”), Golub Capital (“GBDC”) and THL Credit, Inc. (“TCRD”). If we don’t count KED and Compass Diversified (“CODI”) which is a Grantor Trust but which the BDC Reporter follows anyway, that leaves 23 BDCs that we track. If we add back two smaller BDCs that we don’t track on a regular basis and the two new BDC wannabees mentioned above our grand total goes to 27 public BDCs.

MORE BDC ACQUISITIONS IN 2011? MAYBE, MAYBE NOT…

Which is not to say that one or more of the existing cast of players might not get swallowed up by a larger BDC or some other entity. Although the industry has bounced back since the dark days of the Great Recession, there are still 7 BDCs which have not been able to raise new equity in the past year. That suggests investors are not excited about their strategy or prospects and one or more of those companies might seek a strategic buyer. We don’t want to name names because that would just be rampant speculation and there’s too much of that on Wall Street already.

Nor is it likely that an acquisition would result in a big jump in value for existing shareholders as BDC prices -even for the those which have not raised new equity-are already high, and would be buyers are looking for value. We’ll wait and see what develops. In the interim, we welcome Medley and the new TPG Capital BDC to the BDC Reporter.

Disclosure: I am long ARCC, PSEC, CODI, SLRC, GBDC.