BDC Innovation Growth Funds by Lucas Wyrsch at CAFPS Winter Event

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Business Development Companies Innovation Growth Funds Presentation by Lucas Wyrsch at CAFPS Winter Event on November 24, 2013 at ETH Zurich

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BDC Innovation Growth Funds by Lucas Wyrsch at CAFPS Winter Event

  1. 1. Business Development Companies Innovation Growth Funds Lucas Wyrsch CAFPS Winter Event 24th Nov 2013 Zürich
  2. 2. 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.
  3. 3. 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?
  4. 4. BDC Regulation  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 investors!
  5. 5. BDC Analysis  50 BDCs were analyzed with their annual performance between August 3rd, 2012 and August 2nd,2013 50 BDCs are divided into three segments:  Big BDCs  Medium BDCs  Small BDCs  The annual performance of all three segments were measured:  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 8.13%  Small BDCs generated 1.7% with a dividend income of $0.53 or 4.72%
  6. 6. The Selection of Best BDC Cretieria for selection of best BDCs Making safe loans Do strong businesses Generating positive cash flows. Risk Analysis: Average grade of portfolio investments along with the debt-to-equity ratio for each
  7. 7. Risk Mitigation  The best BDCs in managing risk by diversifying portfolio.  BDCs are precluded from putting too many eggs in one basket.  No loan or equity position can account for more than 25% of its total assets.
  8. 8. 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 rates.
  9. 9. 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.
  10. 10. 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.
  11. 11. Dividends of BDC  Stability shows a company is making loans that are getting repaid, especially if the company is paying dividends monthly.  Looking for BDCs that are paying increasing dividends.
  12. 12. 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
  13. 13. Performance of BDC Result analysis (August 13, 2012 – August 9, 2013) Cost Basis Dividends Adj. Basis Price Gain Triangle Capital (NYSE: TCAP) $24.58 $2.13 $22.45 $29.34 30.69% Main Street Capital (NYSE: MAIN) $26.52 $2.32 $24.20 $30.94 27.85% Fifth Street Finance (Nasdaq: FSC) $10.51 $1.20 $9.31 $10.81 16.11% Apollo Global Management $13.52 (NYSE: APO) $1.98 $11.54 $27.98 142.46% KKR (NYSE: KKR) $14.24 $1.63 $12.61 $20.15 59.79% S&P 500 1,405.87 33.71 1,372.16 1,691.42 23.37% These five BDCs with a performance of 55% outperformed the S&P 500 by 37% !
  14. 14. 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.
  15. 15. Europe 2020  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
  16. 16. 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 very low!
  17. 17. Asset liquidity VS asset duration BDCs listed on US stock exchanges are more liquid than private equity funds!
  18. 18. Insurers Structural Investment Advantage Private equity offers highest yields but BDC Innovation Growth funds would offer more liquid + higer performance
  19. 19. 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 Top-Executive Consultant Personal Coach Lucas Wyrsch MD of Swiss Business Club, Risk manager at TGC Consultants, Board member of Ravens Power AG, Manager of Future Power Generation
  20. 20. Thank you very much for your attention! Any question?

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