BDC Review Redux IV: 5 Unusual BDC Opportunities

by: Philip Mause

In the article I wrote nearly a year ago, I identified five BDCs that offered investors the opportunity to invest in a very different mix of assets from those contained in the portfolio of a "typical" BDC. BDCs generally make loans to small and middle sized businesses and generally try to diversify by region and industry to control risk. The typical portfolio throws off interest income, which can be enhanced by a limited amount of leverage. Reasonably regular dividends are distributed producing a nice investment for a yield-oriented investor. These five BDCs march to a different drummer and have put together different portfolios offering a different mix of risks and rewards. In each case, after the name of the company and the symbol, I will provide the price at Friday's close, the price a year ago when I wrote the first article and the current yield.

1. Harris & Harris (NASDAQ:TINY) (3.70) (3.92) (0) - TINY is a apt symbol for a company focused on early stage investments in nanotechnology companies. Its investments tend to be illiquid although it has a large position in Solarzyme (SZYM), a publicly traded company, and TINY periodically generates cash flow by selling calls on SZYM stock or selling the stock itself. TINY has an NAV of $4.88 per share but this consists largely of hard to value preferred stock, warrants and common equity in relatively early stage companies. It is one of the only BDCs whose share price has declined in this time period. TINY could hit some grand slam home runs with some of its investments but it is obviously a riskier investment than some of the loan oriented BDCs we have seen in earlier articles in this series. Watch SZYM stock; if it pops up substantially, it will pull TINY along with it.

2. Medallion Financial (TAXI) (12.06) (9.73) (7.0%) - Another descriptive stock symbol, TAXI makes loans secured by taxicab medallions. In a medallion system, a city issues a limited number of medallions and taxis cannot operate without a medallion. A premium value attaches to the medallion depending upon a variety of things but over the years, in most medallion systems, the value tends to go up. New York City is certainly by far the most important venue where this system controls but other cities have variations of it. Most of TAXI's loans are in the Big Apple but some are in other cities. TAXI has a somewhat confusing array of affiliates and subsidiaries - Medallion Capital, Medallion Financial, and Medallion Bank - and the financial statement can be a bit challenging. But the underlying assets have performed very consistently and reliably over the years. I guess that there is always a risk with this level of industry concentration in a portfolio and, of course, if NYC ever abandons the medallion system, things could get ugly. Nevertheless, TAXI has been a solid performer and, while I would not devote my entire portfolio to it, it can make sense as part of a diversified BDC portfolio.

3. NGP Capital (NGPC) - (7.42)(6.44)(8.6%) - NGPC specializes in financing to the energy industry and, within the energy universe, focuses largely, but not exclusively, on oil and gas related investments. As of June 30, it had a NAV per share of $9.29 and more cash than debt. It appears that some sizable investments were made shortly after the end of the last quarter so the net cash position is probably negative now. It has had some investments go bad, but I have been a fan of this stock for a long time as a yield oriented way to participate in oil and gas development. I think that it is still attractive based on the discount to NAV and that the stock should continue to appreciate in value. Again, industry concentration bears certain risks, but I believe that the discount to NAV overstates those risks in this instance.

4. MVC Capital (NYSE:MVC) - (12.47) (10.91) (3.8%) - MVC has generally developed close relationships with its portfolio companies - in some cases, providing both debt and equity funding and "recapitalizing" businesses in need of assistance. It took a pretty hard hit in the 2009 market but has bounced back. It has some valuable loss carry forwards that it can use to minimize tax expense. With an NAV per share of $16.42, MVC stock could continue to climb. A recent investor presentation available on the company website highlights two portfolio companies that could likely be sold with substantial gains leading to a potential large distribution to shareholders. I will do a more detailed analysis in a future article.

5. Capital Southwest (NASDAQ:CSWC) - (112.81) (81.75) (.8%) - The dividend yield is misleading because CSWC periodically declares and pays special dividends, which can be very generous. CSWC is a "patient investor" (I wish my clarinet instructor had been so patient!) and definitely adheres to the buy and hold philosophy. It has had some absolutely colossal successes (RectorSeal involved an initial investment of $52 thousand recently valued at over $140 million). An investor can do a reasonable sum of the parts calculation on his or her own because many of the holdings are in publicly traded companies. As of June 30, NAV per share was $145.73 but I will try to do a more detailed sum of the parts analysis in a future article. These guys are the "real deal" in terms of successful, careful, long-term investing and have returned tons of cash to shareholders over the years - a recent presentation indicated that after an initial IPO of 14.9 million dollars with no further public offerings, the company has over the years paid dividends of over $70 million in cash and over $11 million in securities.

Each of these five companies is interesting in its own unique way and I suspect that, if you buy all five, you will make out very well in the long run. But there are risks with each of these and they do not provide the same "reliable as clockwork" dividend yields protected by a portfolio of senior secured loans in a wide variety of industries that many "typical" BDCs do.

Disclosure: I am long NGPC, TINY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.