BDC COMMON STOCKS

Week 52

End Days

2024 is nearly at an end. Inconveniently, there are one and a half trading days to come on Monday and Tuesday.

Still, through Friday December 27, 2024, 99% of the year’s trading days are in the back view mirror.

That’s enough to allow us to speak in broad terms of full year 2024 performance.

As noted above, the S&P 500 has had a Very Good Year – to quote the title of a song made famous by Frank Sinatra.

So has the NASDAQ 100, up 27.6%.

Only the Dow Jones has been left behind, clocking in at 16.20% after suffering several record weeks of pullback recently, but still…

Them And Us

Now let’s compare and contrast with the public BDC sector’s price performance after 52 weeks.

BDCZ – that thinly traded exchange traded note, sponsored by UBS, that holds many BDC stocks – is up a measly 2.2% in price terms, including a 1.7% jump this week.

On a total return basis – and quoting Yahoo Finance – BDCZ is up 12.07%.

However, there are many different ways to measure BDC price performance.

S&P uses a different index and on a price basis gives the 2024 increase for the BDC sector as 3.5%. When dividends are included, the total return balloons to 16.5%.

By that measure, BDC investors have – at least – managed to keep up with the Dow Jones.

Maybe more usefully, this year’s total return is superior to the average annual return over 3 years of 10.6%; 10.9% over 5 years and 9.3% over 10 years.

The green-eyed monster – looking enviously over at the NASDAQ and the S&P 500 – might be keeping some BDC investors from being satisfied with this year’s performance, but those returns are really quite robust.

Individual Results May Vary

However, as we’ve been constantly harping on, there has been a great disparity in the price performance of individual BDCs in 2024.

Some have done very well, and when their payouts to shareholders are figured in, a number are beating the S&P 500.

However, some have done very poorly in price terms. Thankfully, every BDC is in a position to pay dividends which has kept total return performance being too poor, but many players are in the red when everything is counted.

Here is the price performance of the 5 BDCs with the largest percentage price increases in 2024:

As you can see, price gains have ranged from 20% to 34%.

Obviously, that’s way above what you might have achieved investing in either the NASDAQ or the S&P 500 and 2x better than entrusting your capital to the Dow Jones.

Here’s the bottom of the barrel data, to compare against:

Here the range of percentage price loss is a – frankly mind boggling – (26%) to (33%).

The gap between a 34% price gain and an (33%) price loss within the span of a year tells us much about how much performance can vary by BDC.

Total Return

Over at BDC Best Ideas we went to the trouble of calculating a total return for every BDC, taking into account the price change up or down through to December 27 and all dividends paid or announced and dividing that number by the BDC’s end of 2023 price.

Here is the Total Return Table calculated in this manner:

Best

As you see 10 BDCs have managed to post a total return in excess of 20%.

Leading the pack is Main Street Capital (MAIN) at 43.4%, followed by Gladstone Capital (GLAD) at 42.5%, just like above. Getting the bronze by this metric is Carlyle Secured Lending (CGBD), with a return of 34.7%.

Worst

Unfortunately, there are also 10 BDCs that have registered a negative total return in 2024, led by Horizon Technology (HRZN), down (21.3%), then by OFS Capital (OFS) off (20.5%) and then by TriplePoint Venture Growth (TPVG) at (19.8%).

If you’d held these 3 BDCs in 2024 you could have lost a fifth of your capital.

Other poor performers include Oaktree Specialty (OCSL) and BlackRock TCP Capital (TCPC), and 5 others.

Not So Great

9 BDCs earned 0% – 8% – pretty poor returns given the strong economic conditions and the performance of some of theit other peers.

Included in this group are SixthStreet Specialty (TSLX) at 7.1%; Saratoga Investment (SAR) at 4.7% and hugely popular Capital Southwest (CSWC), which has taken a precipitous dip of late and is up only 1.7%.

Middling

That leaves 11 BDCs in the 8%-12% return group and 10 in the 12%-20% group, including Ares Capital (ARCC); Fidus Investment (FDUS) and Golub Capital (GBDC).

Looking Forward

All in all, 2024 was a good year to be a BDC investor AS LONG as one managed to avoid or minimize exposure to the bottom quartile of the BDC universe.

That is easy to say but the total return under-performance by GSBD, TCPC, OCSL, TPVG, HRZN and PSEC were more pronounced than we might have expected.

That’s partly a function of markets over-selling under-performing companies.

We may see some correction in 2025 as bottom fishers move in and by year’s end the worst losers may move up the total return table.

Reversed

Monroe Capital (MRCC) was a prime example in 2024 of a formerly beaten down BDC finally getting some love from investors and generating a decent total return of 31.3%, even as its NAVPS fell (2.3%).

The same can be said for FS-KKR Capital (FSK) – up 23.1% while its NAVPS continued to slide by (2.6%).

BDC investors can swing from ruthlessly selling off to being very forgiving as they try to guess what’s coming next.

Very often these bouts of optimism can be wrong so we don’t take it for granted that MRCC and FSK’s turnarounds will continue.

Looking Forward

We’ve covered a lot of ground so we’ll be brief when looking forward into 2025.

Our guess at this point is that the BDC sector is unlikely to match its 2024 total return in 2025.

There is likely to be a reversion to the mean returns-wise and next year could see the beginning of that process.

On the other hand, there is no clear reason to expect the sector’s performance to collapse.

Thanks to higher than expected rates and good credit quality in many of the top BDCs distributions should remain close to their 2024 levels, which should also support stock prices.

A BDC sector total return of 8%-12% seems the most likely outcome.

We hope we won’t regret that foray into the unknowable.

Anyway, we’ll be here every week keeping score and holding ourselves to account.