Horizon Technology Finance Corp. (HRZN) trades at about a discount to NAV, with about a 10% yield at the moment and an expected 18% total-return rate for the next 12-month period, competing with other equities while offering lower downside risk, says Casey Alexander, Director of Research and Special Situations Analyst at Gilford Securities Incorporated.
“We think that premium potential return makes Horizon Technology Finance very attractive in the BDC space. They are a little bit different than the traditional BDC, which normally invests in middle market companies that may or may not be tied to private-equity-sponsored deals. Horizon instead invests in venture-capital-backed companies that have more of an emerging-growth profile, like biotechnology and information technology and health care technology. As a result of that, they also have a higher proportion of equity kickers in their portfolio, which may have a material positive beneficial impact on NAV beyond the return from the underlying loans,” Alexander said.
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Alexander adds that HRZN has strong relationships with venture capital firms, which partner with Horizon to finance part of their venture capital investment, about $5 million to $10 million with significantly reduced risk.
“They sort of top off the operating capital necessary to allow the emerging growth company to get their products to market. As such it tends to be a very, very small sliver of the capital stack, and all of these highly sophisticated venture capital companies are in a position where they would need to lose their entire investment before Horizon were to lose money on one of those loans,” Alexander said.
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