Business development companies with larger-scale portfolios are able to take part in higher-quality deals within the BDC industry and have more resilient income streams, which offers investors less of a negative impact to earnings versus smaller companies, says Sanjay Sakhrani, a Senior Vice President and Analyst at Keefe, Bruyette & Woods, Inc.
“I think from an investor standpoint, it’s a lot easier to invest in a more liquid name from a stock perspective than in an illiquid one,” Sakhrani said. “One of the problems for smaller BDCs is that they are small from a market-cap perspective, and it makes it tough to attract new investors into the name.”
Sakhrani has chosen Ares Capital (ARCC) as one of his top picks in the sector and he has an “outperform” rating on the company. He describes ARCC as one of the larger companies in the BDC space, which allows it to invest more broadly across the market. Sakhrani says ARCC’s dividend yield is about 10.5%.
“The reason we like Ares is they have a lot of liquidity and they’ve been waiting to deploy that liquidity when things got choppier,” he said. “And it seems to us that the competitive dynamic that existed before has eased somewhat, and you’re seeing a pickup in terms of yield, so I think they can probably deploy that liquidity in a more favorable investing environment today.”