It's a mistaken assumption that the world of private-equity investments is only available to the rich and famous. In truth, however, there are plenty of opportunities for investors to put funds to work with firms that specialize in high ROI opportunities. Some of these are public companies where one can buy stock and hold a diversified set of investments. In other cases, private start-ups and professionally managed private funds can be found all over the Internet, and a wee bit of due diligence can yield fantastic opportunities you'd never find anywhere else.
Business Development Companies, or BDC's, must invest at least 70% of their assets in private or thinly traded, public U.S. corporations, and must distribute at least 90% of their taxable income to shareholders in the form of dividends. A number of these companies have gone public over the past decade. A number also ran into big trouble because of the financial crisis. That's why it pays to see who's left standing, because anyone left alive has managed their capital and liquidity really well, and were probably not overleveraged.
Leverage is what it's all about for BDCs. They need to have enough debt financing available to extend that credit to middle market companies at a higher rate. They usually make the difference in this spread, although they will enhance returns by also having an equity piece of the company they invest in. You need to poke through the quarterly reports to see what they invest in, and how solid those businesses are.
Ares Capital (NASDAQ:ARCC) is one BDC that is in pretty good shape, and yields 8.8%. Its stock is up 15% over the past year, and its balance sheet is solid enough to withstand a lot of write-downs should they occur.
Fifth Street Finance (NASDAQ:FSC) is an even stronger choice, I think. With revenue growth of 65% this past year, net margins near 40%, and only a 38% debt-to-equity ratio, the company is in solid financial shape and yields 9%.
Solar Capital (NASDAQ:SLRC) is a relatively new entity, yielding about 10%. This past November, the CEO and COO each purchased 115,000 shares in a private placement at $22.94. That is a real show of confidence from insiders. Compass Diversified Holdings (NYSE:CODI) has investments across manufacturing, distribution, consumer products and business services. It has done very well even during the recession, with solid cash flow and profit, and pays an 8.9% dividend.
Compass Diversified Holdings (NYSE:CODI) has investments across manufacturing, distribution, consumer products and business services. It has done very well even during the recession, with solid cash flow and profit, and pays an 8.9% dividend.The UBS E-TRACS Wells Fargo Business Development Company ETN (NYSEARCA:BDCS) is a new exchange-traded security that invests in a group of BD's, offering even more diversification to your diversification. It's thinly traded, though, so be careful.
On the private side, Prosper.com offers regular people the chance to contribute to a Promissory Note for individuals. Depending on the borrower's credit history, yields can range from 6% to 30% annually. Kickstarter.com is a crowd-funding website, which can serve as a mining source for investors looking to back passion projects with viable business models. A little hunting around the Internet can yield several entrepreneurs who seek $10,000-$100,000 in capital. This niche is a great place to mine for alternative investment opportunities, because it's too small for the big boys to play with, but just right for the average investor who wants to diversify beyond the stock market ... and maybe help someone achieve a dream.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.