Goldman Sachs BDCwebsite
HISTORY: The Company was initially established as Goldman Sachs Liberty Harbor Capital, LLC, a single member Delaware limited liability company, on September 26, 2012 and commenced operations on November 15, 2012 with Goldman Sachs Group, Inc. as its sole member. On March 29, 2013, the Company elected to be regulated as a business development company. Effective April 1, 2013, the Company converted to a Delaware corporation . As a result, at the IPO GSBD had two and a half years of operations as a non-traded BDC, with an institutional shareholder base. The Company went public with the ticker GSBD in March 2015, raising $120mn by selling 6 million shares at $20.The IPO was priced at a slight premium to the Net Asset Value which closed at March 31, 2015 at $19.43. Investment assets were valued at $909mn, debt at $224mn, and equity at $688mn. Total portfolio companies numbered 33. The initial distribution was pegged at $0.45 per quarter. At the time of the IPO, GSBD had already launched a Joint Venture called the Senior Credit Fund, LLC with assets of $181mn and 14 portfolio companies. In its first public 10-Q, GSBD reported accumulated Realized and Unrealized Losses of $17mn, but no loans on non-accrual.
BUSINESS MODEL: The strategy of GSBD is to invest almost exclusively in loans to upper middle market companies, both on its balance sheet and in the JV. Loans are mostly directly originated by the Goldman Sachs Private Credit Group, reported to have over two dozen investment professionals. 0.45 for 8 quarters in a row since going public.
MANAGEMENT: The BDC is externally advised by Goldman Sachs Asset Management L.P. The advisor charges a 1.5% Base Management Fee quarterly in arrears on gross assets, less cash. There is also an Incentive Fee of 20%, subject to a 7.5% threshold However, the Incentive Fee is subject to a cap based on twelve quarter rolling total returns, which includes Realized and Unrealized Gains. For a full discussion of the cap see any quarterly filing. There is also a fee on any realized capital gains in excess of Realized and Unrealized losses, but is unlikely to apply given the BDC’s debt-focused strategy. The BDC pays all its own expenses and any costs incurred by the advisor, which typically amounts to 0.5% of total assets annually.
CAPITAL AND DISTRIBUTION POLICY: GSBD has funded the growth of its portfolio principally with additional debt, and by under-distributing Net Investment Income to shareholders and retaining the funds. The BDC targets “debt to equity” of “o.5x to 0.75x”, and was at 0.74x at the last measurement. All the debt is in the form of a secured Revolver, based on a borrowing base formula, and priced at a favorable rate: 2.55% all-in. In the IVQ of 2016, GSBD expanded its financing sources by issuing $115mn in Unsecured Notes at a yield of 4.5%. That should cause an increase in interest expense in the short term. GSBD’s recurring income (Net Investment Income) return on equity is 8.5%.
BDC PERFORMANCE: On average the loans in GSBD’s portfolio yield just over 10.0%, but the JV-which is highly leveraged-yields nearly 15%. Since the IPO, total assets have grown by about 25% through the end of 2016. Investments on balance sheet et have increased from under $900mn to close to $1.1bn. The JV, too, has been expanded with additional capital contributions. Total companies in the two portfolios have increased to 39 and 32 respectively, across a diversified range of industries. Energy exposure, though, has been minor. Credit-wise, the BDC has had only a few problematic borrowers, and total Realized and Unrealized Losses have reached $77mn by 9-20-2016, a $60mn increase, or about 1.4% of capital at par a quarter. Currently one portfolio loan is on non-accrual.
Thanks to a decent yield, a below average Management Fee and occasionally lower Incentive Fee, the proportion of investment income being earned by shareholders is higher than the BDC average, with nearly two-thirds of investment income dropping to the recurring earnings line. However, Realized and Unrealized Losses have diminished those returns by about 40% in 2016 YTD. Nonetheless, the BDC has maintained an unchanged distribution at $0.45 for 8 quarters in a row since going public.
STOCK PERFORMANCE: GSBD’s stock has traded at or above Net Asset Value in its short history. Shortly after going public the stock price rose as high as $25.19 in the summer of 2015, but slumped to $17.91 a month later. That was a discount to NAV. However, the stock revived and traded in a band between $19 and $21 for months, but slumping again with the general credit sell-off in early 2016, when a new all-time low was reached of $17.41. Since then,though, GSBD has been trending upward, reaching a high of $23.79 early in January 2017. Many observers are surprised Goldman has not used the opportunity to raise additional equity capital at a premium, as the stock has been above Net Asset Value for nearly a year.
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