Business Development Companies (BDCs) are an “ideal vehicle” for private credit exposure, according to a new report by investment ratings firm RSMR.
The business said that taking exposure to private credit through BDCs offers several major benefits, including high income, liquidity and diversification.
“A major attraction of BDCs is their high dividend payouts, which have ranged between eight per cent and 20 per cent over the last decade. This feature makes them an appealing option for income‑focused investors,” the firm said.
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“Listed BDCs are publicly traded on major stock exchanges, which provides daily liquidity and allows investors to easily enter or exit positions. This alleviates the complexities or liquidity challenges associated with direct private debt and private equity investments, or even non‑traded BDCs,” it added.
It said that BDCs are also usually invested in a portfolio of private companies across many different industries, helping to manage risk.
However, the report acknowledged that BDCs “are not without risk” and that a “selective, bottom up approach” is essential.
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“When choosing BDCs, we focus on credit quality and quality of management, aiming to exclude entities that we think are likely to struggle growing their loan book or maintaining appropriate lending standards,” RSMR said.
The firm added that it has found including private credit in a multi-asset portfolio can enhance the portfolio’s yield and diversification, without materially increasing volatility.
“Combining bottom-up credit selection with top-down asset allocation helps to mitigate the risks associated with private credit,” it said.
Read more: ‘Massive opportunity’ for investment-grade private credit
