BDC Innovation Growth Funds by Lucas Wyrsch at CAFPS Winter Event
Business Development Companies
Innovation Growth Funds
CAFPS Winter Event 24th Nov 2013 Zürich
What is a BDC?
Business Development Companies or BDCs are a
form of publicly traded private equities in the United
States that invest in small, upcoming businesses.
This form of company was created by Congress in
1980 as amendments to the Investment Company
Act of 1940.
What is a BDC?
Hercules Technology Growth Capital Inc (NYSE:HTGC) defines a BDC as follows:
Congress created Business Development Companies (BDCs) in 1980 to provide public
investors another means to invest in the long-term growth of private U.S. businesses.
BDCs invest their capital primarily in small and middle market private companies in the
U.S. Typically, BDCs are structured to originate and hold debt and equity investments
to maturity and can invest across a portfolio company’s capital structure. In order to
qualify as a BDC, companies must be registered in compliance with Section 54 of the
Investment Company Act of 1940. Among other restrictions, BDCs are required to
maintain an asset coverage ratio of at least 200% in order to borrow or pay dividends
and to meet specific asset diversification requirements. In addition, BDCs that are
regulated investment companies for U.S. federal income tax purposes, such as
Hercules Technology Growth Capital, are required to distribute at least 90% of
investment company taxable income to shareholders in order to avoid corporate
income tax on distributed taxable income.
BDCs are High Yielding, Publicly Listed US Venture Capital
Firms without Income Tax
Source: http://www.htgc.com/ INVESTOR RELATIONS - What is a BDC?
BDCs must be subject to all relevant provisions of the
Investment Company Act, which
limits how much debt a BDC may incur,
prohibits certain types of affiliated transactions,
requires a code of ethics and a comprehensive compliance program, and
requires regulation by the SEC or Securities and Exchange Commission and
subject to regular examination, like all mutual funds and closed-end funds
BDCs as regulated investment companies must distribute
at least 90 percent of taxable income as dividends to
50 BDCs were analyzed with their annual performance
between August 3rd, 2012 and August 2nd,2013
50 BDCs are divided into three segments:
The annual performance of all three segments were
Big BDCs generated 44.9% with a dividend income of $1.60 or 6.5%
Medium BDCs generated 25.7% with a dividend income of $1.38 or
Small BDCs generated 1.7% with a dividend income of $0.53 or 4.72%
The Selection of Best BDC
Cretieria for selection of best BDCs
Making safe loans
Do strong businesses
Generating positive cash flows.
Average grade of portfolio
investments along with the
debt-to-equity ratio for each
The best BDCs in managing risk by diversifying portfolio.
BDCs are precluded from putting too many eggs in one
No loan or equity position can account for more than 25%
of its total assets.
Which BDC has best credit rating?
Could borrow at very low rates.
Banks define interest rates by measuring risk depending
on strength of balance sheet.
BDCs with little debt can borrow more money at lower
BDCs with low debt
Federal rules say that every dollar of BDC debt has to be
"covered" by two dollars of assets.
A lot of BDCs borrow every dime they can. But others
borrow only when they find a compelling opportunity.
A BDC with no capacity to borrow, doesn't have the same
options that a BDC with more modest debt may have.
If the economy worsens, BDCs with more borrowing
power can take equity stakes in companies that need
financing to weather the storm.
If times are good, they are in the best possible position as
they can take whatever opportunities they want to help
finance serious growth.
Insider Commitment for BDC
Select companies with strong insider ownership as this is
a strong indicator of a BDC's strength.
If board and executives own shares it indicates their
commitment to excel.
Dividends of BDC
Stability shows a company is making loans that are
getting repaid, especially if the company is paying
Looking for BDCs that are paying increasing dividends.
Performance of BDC
Above average performance is key!
Invest in BDCs that have delivered consistent, aboveaverage gains over a long period of time..
The relative strength index would be used
Performance of BDC
Result analysis (August 13, 2012 – August 9, 2013)
Cost Basis Dividends
Adj. Basis Price
Main Street Capital
Fifth Street Finance
Apollo Global Management
These five BDCs with a performance of 55% outperformed the S&P 500
by 37% !
Europe’s largest institutional investor
Insurance companies are Europe’s largest institutional investor
with assets of €7.7 trillion in 2011
Total assets under management in Europe: €15.1 trillion on
December 31, 2011
Banks had lending assets of approximately €46 trillion but are
not considered institutional investors.
Business is all about innovation and marketing
Europe needs more business, more growth to create more
jobs according to its Annual Growth Survey 2014
The biggest challenge facing Europe's economy is how to
sustain the recovery that is underway.
European Commission’s “Europe 2020” initiative seeks to
deliver a smart an sustainable strategy for growth that will
create a competitive economy with higher employment
EU’s low interest rate dilemma
Swiss Re’s latest sigma study explores how interest rates
affect insurers, and why low interest rates are particularly
strenuous for life insurers
Interest rates have been falling for decades and are now
Asset liquidity VS asset duration
BDCs listed on US
stock exchanges are
more liquid than
private equity funds!
Insurers Structural Investment Advantage
Private equity offers highest yields but BDC Innovation
Growth funds would offer more liquid + higer performance
Who we are?
Dr. Philippe Beckers
Partner at Bank Architect
CEO, Adepa Asset Management
Former COO of Pictet Funds
Former COO of Safdié Bank S. A.
Dr. Jan Hendrik Taubert
Dr. Jan Hendrik Taubert
Rechtsanwalt / Attorney-at-Law
MD of Swiss Business Club,
Risk manager at TGC Consultants,
Board member of Ravens Power AG,
Manager of Future Power Generation
Thank you very much for your