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Nicholas Marshi
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Nicholas Marshi is the Chief Investment Officer of Southland Capital Management (SCM). The Company is a Registered Investment Adviser ("RIA") in Santa Monica, California. SCM's principal expertise is in the area of leveraged finance to U.S. private companies, with a focus on the... More
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  • BDCs That Could Benefit From An M&A Revival 2 comments
    Feb 13, 2013 12:11 PM | about stocks: MVC, ACAS, FDUS, GAIN, HRZN, MCGC, PNNT, PSEC, TCAP, TCRD

    We only began tracking smaller, equity oriented BDC MVC Capital recently, so we don't know the portfolio intimately. However, we were impressed with today's big announcement of the sale of a portfolio company owned since 2006 for a huge Realized Gain. Here is an extract: "

    MVC Capital, Inc. (MVC) (the "Company"), a publicly traded business development company that makes private debt and equity investments, announced today the signing of a definitive agreement to sell one of its portfolio companies, Summit Research Labs ("Summit"), a specialty chemical company that manufactures and markets antiperspirant actives globally, to an affiliate of One Rock Capital Partners, LLC, subject to regulatory approvals and the satisfaction of other customary closing conditions, including an escrow.

    Assuming full realization of the closing conditions and escrow and the sale of SCSD, MVC Capital would receive gross proceeds from its equity investment of approximately $63 million, that results in an estimated gross IRR of 31% since August 2006 (the time of the original investment). The gross IRR includes all fees and distributions received from its equity position in Summit over the life of the investment. The transaction is expected to close prior to March 31, 2013.

    "We are pleased to have reached an agreement to monetize our investment in Summit, expected to result in a realized gain of approximately $47 million[1]. This gain is in addition to the $12 million special dividend MVC received from Summit in 2012, adding to the overall return of this investment and highlighting our ability to build shareholder value," said Michael Tokarz, Chairman and Portfolio Manager of MVC. "MVC's management will look to redeploy the proceeds from the sale of Summit with a focus on building shareholder value."

    We remind investors that MVC had another coup last quarter where a portfolio investment was sold for 2.5x it's original investment. However, this post is not about MVC. These two transactions illustrate what might become one of the key features of the BDC industry in 2013: equity realizations. Most Business Development Companies have a number of minority and majority equity and warrant investments. In recent years only a handful of these investments have resulted in positive realizations because the M&A market has been in the doldrums.

    However, with the cheapest money in history, a growing economy and a reduction in general market anxiety, we might see a dramatic change in the landscape. Both the BDCs themselves when they are in control and the Private Equity groups (where BDCs are minority owners) are very motivated to realize these investments. Many, like Summit, have been on the books for many years.

    Moreover, many BDCs have made strategic changes in recent years, promising to reduce their equity investments as a proportion of their portfolio when the opportunity occurs. As a result, if and when equity investments are realized we should see the bulk of the proceeds eventually be re-invested in loan investments rather than back into equity transactions at many BDCs, which should boost recurring earnings.

    Running down the 35 BDCs we track, the BDCs which have most to gain from a revived M&A market include the following (we're doing this from memory):

    American Capital (NASDAQ:ACAS)

    Fidus Investment (NASDAQ:FDUS)

    Gladstone Investment (NASDAQ:GAIN)

    Horizon Technology (NASDAQ:HRZN)

    Hercules Technology (NASDAQ:HTGC)

    Main Street Capital (NYSE:MAIN)

    MCG Capital (NASDAQ:MCGC)

    MVC Capital (NYSE:MVC)

    PennantPark Investment (NASDAQ:PNNT)

    Prospect Capital (NASDAQ:PSEC)

    Triangle Capital (NYSE:TCAP)

    THL Credit (NASDAQ:TCRD)

    Disclosure: I am long MVC, ACAS, FDUS, GAIN, HRZN, MCGC, MVC, PNNT, PSEC, TCAP, TCRD.

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Comments (2)
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  • green tube
    , contributor
    Comments (425) | Send Message
    under "disclosure" you list MVC twice. was one of those intended to be MCC?
    17 Feb 2013, 12:30 PM Reply Like
  • Nicholas Marshi
    , contributor
    Comments (584) | Send Message
    Author’s reply » Yes. sorry.
    17 Feb 2013, 03:19 PM Reply Like
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