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I live in Southern California and work in the finance industry. BDCs are a special outside of work interest of mine and I have begun a blog to document my research. I always welcome questions/comments/discussions.
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  • Does The CFA Exam Waste A Billion Dollars?


    The Chartered Financial Analyst (NASDAQ:CFA) designation is an achievement that is very difficult and time-consuming to reach. Many companies in the investment industry seek to hire and promote candidates that have achieved a CFA charter. These companies will usually encourage employees to register and take the exams. With the June exam now in the rearview mirror for many people (this author included), it is time to ask, should companies even support their employees taking the CFA exam?


    The week before this year's exam as I was sitting in a library and noticed many other candidates studying, I thought back to a common press release that is published each year by Challenger, Grey & Christmas Inc that attempts to quantify the lost productivity due March Madness. Following in the footsteps of that article, I will document out the lost time, quantify it and see if the markets show any excess volatility in that period.

    The CFA institute reports that successful candidates spend at least 300 hours studying for the exam. Since the pass rate is often below 50% for the exams, this number will be reduced down to 200 hours on a per candidate basis. If you studied less than that and passed the exams, congratulations! If you studied more and still failed, there is always next year.

    Looking at the link above, we can see that the number of student taking the exams has risen each year from just over 76,000 in 2002 to over 149,000 for the June 2012 exam. This number includes all registered candidates, so it overstates the number of people that actually took the exam (if you look around on exam day, you will see a good number of empty chairs for level 1 and 2). Assuming the number of candidates sitting for the exam increased by 5% over the previous year, the estimated total for June 2012 is 120,000 people.

    The Challenger article cites the average private-sector wage as $23.29 per hour. It is safe to say many candidates in the financial industry dwarf this wage, but candidates in other countries may make less. For the purposes of simplicity, I will round this number to $25 per hour as a wage.

    Using the simple math of Average Hours Studied * Number of Candidates * $25 means for 2012, over $600 million of productivity was lost by the CFA exam. If we use the higher estimates for this number, it could easily translate into over a billion dollars of productivity lost to the exam.

    Here are some estimates for the past 5 years. Note: I excluded the December test takers from this calculation, so these estimates may understate the effects:

    June 2, 2007: 71,897 participants, $359 million

    June 7, 2008: 92,081 participants, $460 million

    June 6, 2009: 104,116 participants, $520 million

    June 5, 2010: 111,731 participants, $558 million

    June 4, 2011: 115,027 participants, $575 million


    Given the above information, it comes back to the point, should companies still sponsor the CFA charter? The lost time in productivity is staggering. Companies are losing worker hours. The average charter holder will have studied for over 900 hours to pass all three exams. This time could have been spent making business contacts, working more or anything else. Despite all of this, many people (myself included) still believe that the curriculum is beneficial and has enhanced their productivity at work. This is evident in the steadily increasing enrollment to take the exam each year. Congratulations to everyone who studied and sat for the exam. Enjoy these next few weeks before results come out and hopefully the CFA Institute does not add a Level IV to the testing requirements.

    Tags: IWM, SPY, CFA, Investing
    Jun 21 12:44 PM | Link | 8 Comments
  • TCAP Q3 2011 beats estimates, raises dividend, rapid reaction
    As reported on Yahoo and other sites, TCAP had a very solid Q3. I expected a good quarter when I did my write-up on TCAP, but this is impressive.

    Some highlights:
    • Average NII of 52 cents/share (based on average share count)
    • NAV increase to 14.59
    • Average yield of 15.1% on investments

    Very impressive and I look forward to the CC -

    Nov 02 5:20 PM | Link | 1 Comment
  • Monroe Capital Corp NASDAQ: MRCC


    Monroe Capital Corp filed papers to register as a BDC on March 3rd, they just recently filed amended papers on April 19th (N-2/A) for their shelf statement (correcting a typo in the original filing and increasing the fees). This new BDC is a division of Monroe Capital, a smaller private lender that was established in 2004 and currently manages around $440mm. There is an "MCAP" (Mango Capital) traded on the OTC BB, so for this stock, they went with "MRCC" instead (all of the good M tickers are taken). There is a backlog of new BDCs to profile and that raises a concern. We all know from Porter's 5 Forces that Barriers to Entry is a key driver for a company maintaining superior returns. It appears the SEC registration process is no longer a barrier for a number of smaller CLO/PE managers and the potential returns are worth the effort. Will this increased competition hurt some of the other BDCs? Only time and the 10-Qs will tell.



    The company will use Monroe Capital BDC Advisors, LLC (MCAD), an entity formed for the purpose of serving as investment advisor. MCAD will provide MRCC with investment professionals and portfolio selection. Interestingly, they will also use another LLC - Monroe Capital Management Advisors (MCMA), LLC to serve as the administrator. The two entities mean that expenses are split - MCAD will receive the management and performance fees and MCMA will bill MRCC the proportional share of expenses. This setup is slightly different from other external managers and it may result in additional expenses, but there is no way to know how this setup will affect returns.


    People in Charge

    The investment decisions will be led by Theodore L. Koenig and Daniel M. Duffy. Theodore Koenig is a former lawyer, coming from the defunct firm of Holleb & Coef. After Holleb, he was president and CEO of Hilco Capital. Daniel M. Duffy comes from a more traditional finance background by way of CapitalSource and GE Capital. From what I can find on Mr. Duffy via his old CapitalSource bio:

    Mr. Duffy has over 21 years of experience in corporate finance providing both debt and equity capital to companies in a wide range of industries. Mr. Duffy has been with CapitalSource since April 2003. Prior to joining CapitalSource Mr. Duffy was managing director in charge of GE Capital's debt placement team. Mr. Duffy joined GE Capital via its acquisition of Heller Financial where he spent 12 years acting in a number of leadership roles including co-head of the media lending team senior credit officer in corporate finance senior credit officer in equipment finance and team leader in loan workouts. Prior to joining Heller Mr. Duffy received his B.S. in accounting from Northern Illinois University in 1984.  

    The filing also mentions that 18 professionals from Monroe Capital will also be supporting the firm. There will be no direct employees.


    This is something interesting to note. In the original filing (glad I did not post this last week), the management fees were stated as 1%, as of the 4/19 filing, management fees are stated as: "calculated at an annual rate equal to 2% of our total assets (which includes cash, cash equivalents and assets purchased with borrowed amounts)." The inclusion of cash and cash equivalents makes this one of the higher management fees. The first part of the incentive fee is 20% of Net Investment Income subject to an 8% annual hurdle rate. 

    The first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment income (including interest that is accrued but not yet received in cash), subject to a 2% quarterly (8% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, MC Advisors receives no incentive fee until our net investment income equals the hurdle rate of 2% but then receives, as a “catch-up,” 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, MC Advisors will receive 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply. The first component of the incentive fee will be computed and paid on income that may include interest that is accrued but not yet received in cash.

    The second part is:

    The second part is determined and payable in arrears as of the end of each fiscal year in an amount equal to 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of the year, computed net of all realized capital losses on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.


    This is similar to other BDCs like BKCC where a huge liability may be payable at the end of the year and introduce some seasonal earnings into the 10-Q analysis. One other note - Monroe is also looking to pay up to 50% of the fee (pursuant to SEC approval) in MCBDC stock. 


    Portfolio Composition

    The company expects to invest most of the proceeds of the IPO within 9 months. They also state they expect to exceed the hurdle rate within that time. This means that incentive fees will be paid within the first year. It is interesting that the filing does not have a "grace period" for these fees. The company intends to purchase a portfolio of 34 loans from Monroe Capital that will be either senior, unitranche or junior-secured. The firm

    expects to make investments in the $5mm to $25mm range, but maintains that range may drift as the firm's capitalization increases. As per the filing, the initial portfolio will have these statistics:
      •   Loans with a weighted average yield of 7% to 8%;
      •   Emphasis on middle market transactions;
      •   Minimum of 90% senior debt investments (including unitranche debt);
      •   Maximum concentration of 15% in any one industry;
      •   Average loan position of less than $5,000,000; and
      •   Loans with maximum loan-to-enterprise value ratio of between 50% to 70%


    Standard risks are outlined here - The N-2/A has a lengthy list of risks as well that are worth reading.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: BKCC
    Apr 27 1:23 AM | Link | Comment!
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