I recently suggested that Business Development Companies (BDCs) merit further investigation for income-oriented investors. Given the complexity of some of the management structures as well as the risky nature of the underlying investments made, investors interested in this niche should pay careful attention to the alignment of interests between management and shareholders. I had indicated that I would follow up with a review of this dynamic if readers were interested, and that was overwhelmingly the case. Therefore, I am reviewing each of the 14 dividend-paying BDCs I had highlighted in order to assess the amount of "skin-in-the-game."
After recently reviewing Ares Capital (ARCC), the largest of the group, I followed up with a review of Apollo Investment (NASDAQ:AINV). Today, I am reviewing Prospect Capital (NASDAQ:PSEC), which is the 3rd largest of the BDCs with a market cap of $1 billion. PSEC has been trading publicly since 2004:
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The company filed its proxy on 9/16. As is the case for many other BDCs, management is provided by an affilliate, in this case Prospect Capital Management.
Total insider ownership is listed in the proxy as 2.3%, almost all of which belongs to John Barry, who owns 2.4mm shares (2.2%). Barry (59) has served as Chairman and CEO since 2004. This provides relatively good alignment, though investors would be better served by broader equity support among PCM employees.
Due to the structure of outside management, investors are unable to clearly weigh the alignment of interests, as there is no disclosure regarding salary and incentive pay levels (or metrics) for the individuals involved in running the firm. As the 10-K describes in detail, there are many potential conflicts of interest.
While there are many more BDCs to evaluate regarding management's alignment with shareholder's, PSEC looks to be far superior to the previously reviewed AINV and similar to ARCC. All three share the same outside management structure.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.