I recently suggested that business development companies 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."
So far, I have reviewed Ares Capital (NASDAQ:ARCC), the largest of the group, Apollo Investment (NASDAQ:AINV), the worst in terms of alignment, Prospect Capital (NASDAQ:PSEC), Fifth Street Finance (NASDAQ:FSC), BlackRock Kelso (NASDAQ:BKCC), PennantPark (NASDAQ:PNNT), Solar Capital (NASDAQ:SLRC), Hercules Technology Growth Capital (NYSE:HTGC) and Main Street Capital (NYSE:MAIN). Triangle Capital (NYSE:TCAP), which has a market cap of about $400 million has traded publicly since early 2007 (click to enlarge image):
The company filed its annual proxy statement on March 28th. Unlike most of its peers, where management is provided by an affiliated company, TCAP is self-managed. CEO Garland Tucker III (63) has headed the firm since it was formed in 2007 and formed Triangle Capital Partners in 2000. CIO Brent Burgess and CFO Steven Lilly both serve on the board and have been with Tucker since 2002 and 2005 respectively.
Total ownership of directors and officers is listed at 4.4%, which puts it above average for the BDCs. At the time of the proxy, Tucker owned 600K shares (1.2%). The balance was held primarily by the two other executive officers and one of the independent directors. A 4mm share offering in Q3 reduced the ownership percentage somewhat.
Due to the common structure of outside management, BDC investors are often 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 company. Because it is internally managed, this information is available for TCAP. Tucker's salary in 2010 was $304K, and he received a cash bonus of $317.5K. Burgess and Lilly's pay was slightly lower. Additionally, Tucker received $365K in restricted stock (slightly lower for the other two execs), for total compensation of $1.13mm (including perqs as well as dividends from his restricted stock). All in all, the compensation seems reasonable though perhaps a skewed too much towards cash.
While there are a few more BDCs to evaluate regarding management's alignment with shareholders, Triangle Capital appears better than average given insider ownership levels and internal management. Main Street looks superior to all of the previously reviewed BDCs, especially Apollo Investment. With the exception of Fifth Street Finance, all of the BDCs I have reviewed are permitted to sell stock below the NAV, which I find to be a negative. The best alignment so far beyond MAIN has been Hercules Technology Growth Capital. I think that Solar Capital and Fifth Street Finance stand out from the crowd as well.
While many factors ultimately influence the level of future dividends, it is very likely that the ownership of Tucker and his team and outside directors creates an incentive for its management team to steer it in a direction that sustains or even grows the payment without taking excessive risk. The fact that the company hasn't cut its dividend since the IPO reinforces this apparent alignment of the interests of management with investors.