Seeking Alpha

John Cole Scott

 
View as an RSS Feed
View John Cole Scott's Comments BY TICKER:
Latest  |  Highest rated
  • Investing In Business Development Companies (BDCs) [View article]
    I think reminding people that a BDC has the investor protections of the 1940 Investment Company Act is important as many people we have talked to over the past year about BDCs have commented on BDCs like they are operating companies, REITs or MLPs which are actively managed assets... but do not have the investor protections of The 40 Act, like an independent board of directors, and generally not being allowed in affiliate transactions, etc.

    I understand your confusion, but there is only one traditional CEF that buys BDCs (FGB) and there are 51 closed-ended management companies that electi to be treated by the BDC regulations of 1980. Yet there is only $34.3B in market capitalization and 4-7 BDC IPOs per year the past 5 years. It would have been great if people started calling the Business Development Company Funds in 1980, but they did not.

    As a wider audience of investors and investment professionals potentially use BDCs for a portion their investment allocation I think it is better to have them understand that the investment is a fund vs. what people have called them for years, "companies". My final point would be if you are having this discussion you are not the investor/advisor that needs the detail explained.

    Dkostek, I would say your clarification on BDCs is partially true, but if you read the BDC 1980 act, the key provisos in my opinion are the 70% US Private or $250M market cap, the ability to charge incentive fees, slightly higher leverage levels and potential access to SBIC facilities.
    Nov 26, 2014. 04:00 PM | 3 Likes Like |Link to Comment
  • Closed-End Fund Advisors: Third-Quarter 2014 CEF/BDC Review And Outlook [View article]
    FS - I know there has been more general market volatility in recent months, but if you look at 12 month St Dev for the major CEF groups: US Equity, Non US Equity, Specialty Equity, Taxable Bond and Muni Bond we see the following data, where we have rights to use/show since June 2012.

    Muni Bond Funds are at 54 month trailing volatility lows (Peak of 15... down to 9),

    Taxable bond funds are just barely off their lows (peak of 18 ... down to 9.5),

    Specialty Equity and bumped up a little bit from just under 13 to just over 13, but were 24 in June of 2012.

    Non US Equity Funds are pretty low on a recent historical basis (peak of over 27, down to 16-17 and just off a recent low of 15.

    US Equity Funds are up to 16 for a recent low of 15 (peak of almost 27, but has been between 15-17 since 12/31/12.
    Oct 22, 2014. 08:39 AM | Likes Like |Link to Comment
  • BDC Boot Camp: An Introduction To The 9.7% Yield Animals, Debt-Based Business Development Companies [View article]
    FS,

    Very good points. The index removal we complete at the end of second quarter. IMO, there is a good market for BDC investing from family offices and endowments, especially as we expect some fee compression in the next few years. But, you are correct good management writing good deals is crucial for BDCs to perform well through the eventual bumps in the road.

    There is a lot of demand that we have fielded in the past quarter or two for liquid exposure to cheaply leveraged permanent capital that invests in venture debt. We also found that debt-BDCs did well in the last rise in interest rates.

    Generally, a net increase of buyers in any CEF sector narrows discounts.
    Oct 17, 2014. 09:46 PM | Likes Like |Link to Comment
  • BDC Boot Camp: An Introduction To The 9.7% Yield Animals, Debt-Based Business Development Companies [View article]
    BDCs are highly transparent. Fraud can happen but with 51 BDCs the market will reward good management and best practices in my opinion.
    Oct 17, 2014. 08:34 PM | Likes Like |Link to Comment
  • BDC Boot Camp: An Introduction To The 9.7% Yield Animals, Debt-Based Business Development Companies [View article]
    Many BDCs have moved to using outside business evaluation firm like Mercer to calculate their NAV. The SEC is stepping up audits because there are 10X the number of debt BDCs in 2014 vs. 2004. There have been 4-7 BDC IPOs the past 4-5 years. More investors own BDCs so they are covering them better. I attended The Sutherland BDC Roundtable last month in DC and the SEC panel was very favorable towards the BDC structure. The key points I left with was that BDCs need to execute their portfolio evaluation policies as disclosed to shareholders and be careful on affiliate transactions.
    Oct 17, 2014. 08:33 PM | Likes Like |Link to Comment
  • BDC Boot Camp: An Introduction To The 9.7% Yield Animals, Debt-Based Business Development Companies [View article]
    Akaralph,

    NAV performance was not too bad over that time period, but yes, market prices for venture debt investments aka BDC debt-based funds were negative during the financial crisis.

    What we found interesting is that according to SNL Financial, from July 2009 to September 2014 BDCs averaged 175% total return and the S&P 500 is only up about 140% total return.
    Oct 17, 2014. 08:28 PM | Likes Like |Link to Comment
  • Closed-End Fund Advisors: Third-Quarter 2014 CEF/BDC Review And Outlook [View article]
    Stevlg - we release our net performance on our portfolio models publicly each quarter. We are very pleased with our results, call or email the office to get the figure emails or sent via mail. If you sign-up for our email alerts we combine the release of our CEF/BDC research call and quarterly performance in the same email release.
    Oct 17, 2014. 08:14 PM | Likes Like |Link to Comment
  • Closed-End Fund Advisors: Third-Quarter 2014 CEF/BDC Review And Outlook [View article]
    I understand not thinking of BDCs like CEFs but they are CEFs they are granted a few special benefits and are governed by the 1940 Act and FINRA regulations like SBoX and Dodd-Frank. They are required to have an independent board of directors like regular 40 acts funds. We think of them as a CEF sector. Traditional CEFs would do regular secondaries if they traded at average premiums to NAV. I don't see how that is the factor that makes them a CEF or not. But to help avoid confusion we try to call them BDCs vs pure CEFs and the due have filing like transitional operating companies and have a P/E ratio, etc.

    The keys to a closed-ended management company is the traditional 40 act details, the ability to use permanent and structural leverage and permanent capital.

    Some people say that their ability to charge performance based fees makes them not a CEF, but if you look at CEF and CEF-like structures across the world we are not aware of another country that disallows performance based fees as CEFs outside the US at thought of more like a liquid hedge fund with permanent capital.

    You are welcome to any opinion you desire but I would ask you to find a BDC that does not say on their website or filings,

    ... XXX is a publicly-traded closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended...
    Oct 17, 2014. 08:11 PM | Likes Like |Link to Comment
  • Closed-End Fund Advisors: Third-Quarter 2014 CEF/BDC Review And Outlook [View article]
    I understand not thinking of BDCs like CEFs but they are CEFs they are granted a few special benefits and are governed by the 1940 Act and FINRA regulations like SBoX and Dodd-Frank. They are required to have an independent board of directors like regular 40 acts funds. We think of them as a CEF sector. Traditional CEFs would do regular secondaries if they traded at average premiums to NAV. I don't see how that is the factor that makes them a CEF or not. But to help avoid confusion we try to call them BDCs vs pure CEFs and the due have filing like transitional operating companies and have a P/E ratio, etc.

    The keys to a closed-ended management company is the traditional 40 act details, the ability to use permanent and structural leverage and permanent capital.

    Some people say that their ability to charge performance based fees makes them not a CEF, but if you look at CEF and CEF-like structures across the world we are not aware of another country that disallows performance based fees as CEFs outside the US at thought of more like a liquid hedge fund with permanent capital.

    You are welcome to any opinion you disire but I would ask you to find a BDC that does not say on thier webiste or filings,

    ... XXX is a publicly-traded closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended...
    Oct 17, 2014. 08:11 PM | Likes Like |Link to Comment
  • Balancing CEF Data Vs. Portfolio Data When Selecting A Closed-End Fund [View article]
    Thank you W.Kirk. As my father's CEF book was published almost 25 years ago, I expect to update it from my articles at some point.
    Jason, glad you found it helpful.
    Sep 16, 2014. 08:10 PM | Likes Like |Link to Comment
  • Closed-End Funds: Rising Rates And The Impact On Performance And Yield [View article]
    Here is the link to the Heat Maps' Key

    http://bit.ly/XD1gg2
    Aug 21, 2014. 11:50 AM | Likes Like |Link to Comment
  • Closed-End Funds: Rising Rates And The Impact On Performance And Yield [View article]
    BPS, the Heatmap at http://cefanalyzer.com is not our business, but a friend's website. I don't notice the heat map categories when looking at it, but will ask Al Patrick who runs the site to add a key.

    Also - we rarely discuss funds in particular in public, except for educational purposes. There are other SA authors who give their ideas to readers. Our goal is to get feedback on idea and cover the structure.

    Kirk, not 100% sure what happened at each fund or fund sectors/managers, but I can share the data file with you if you want to dig deeper and discuss after. My guess is bonds we're called early in cycle and div policies were set too high and boards were reluctant to change levels in line with earnings. For munis there could have also been zeros exposure.

    We just Plan to be tactical as usual. Just wanted a sense of the current.
    Aug 19, 2014. 11:11 PM | Likes Like |Link to Comment
  • Closed-End Fund Advisors: Second Quarter 2014 CEF Review And Outlook [View article]
    FS, Thanks Markel is a great local company and thought of as a "mini Berkshire". They bought a friend's private company as their first private equity play and carry our E&O insurance. They are a great employer to friends that work there, we enjoy having them as our insurance carrier and they do great work in the community.

    I don't know Tom well, but have had many interactions with Alan and Steve.

    We are working on lots of data to try and help us get to the next level of review of the 50 BDC CEFs that currently exist. Expenses, impact of secondary's, dividend coverage and growth - interest rate sensitivity and how each might handle a downturn in the economy are high on the list. I like to look at peer and security's historical data as a big part of our research approach.
    Jul 22, 2014. 01:04 PM | Likes Like |Link to Comment
  • Closed-End Fund Advisors: Second Quarter 2014 CEF Review And Outlook [View article]
    Fred, Very well put, thank you. However, I am the type of guy that would argue with my three-year old that a tomato is a fruit not a vegetable.

    I do recognize we are early and do see people are happy with our added coverage. I'll be curious how the comments go on next quarter's research call summary article.
    Jul 22, 2014. 12:02 PM | Likes Like |Link to Comment
  • Closed-End Fund Advisors: Second Quarter 2014 CEF Review And Outlook [View article]
    Ok, it seems most people dislike our use of BDC CEF to describe the funds. One reason we took so long to cover BDCs was because we kept thinking of them as operating companies and not as traded funds with inefficiencies and yield. We know there are difference in the required portfolio holdings, but Sr. Loan CEFs, especially NHF are unique, ... and yes BDC CEFs have incentive fees unlike traditional CEFs. The deeper I have landed in CEF research and analysis the more exception to the rules I find. As we discuss the future of CEFs I see a path that lies closer to current BDCs for the next decade of innovation and growth for CEFs than simply hiring a manger to lever up a yieldy investment with permanent capital. There are lots of great funds, but what will we IPO from 2015-2025 in the CEF market? That is a question we are working to help answer.

    In my conversations the past few years, most people are not aware that BDCs are a fund, so we added CEF after BDC to clarify and attempt to reduce the confusion we see in our conversations across individual investors and financial advisors.

    We hear some traditional CEF sponsors looking at BDCs and more sponsors doing Trad CEFs and BDC CEFs. I think a year from now we will know if our work in clarifying BDCs as BDC CEFs was early or wrong.

    It feels like i'm beating a clearly dead horse here, but a BDC is a closed-end fund that is a fact not an opinion. We are not making up words, we are not saying that a non closed-end funds is "closed-end fund-like" as I would argue Berkshire, GE, Markel and other operating companies.
    Jul 22, 2014. 11:54 AM | Likes Like |Link to Comment
COMMENTS STATS
113 Comments
19 Likes