Why My Favorite ‘Private Equity’ Sector is under Selling Pressure

Mark Skousen
|
Posted: May 24, 2014 12:01 AM
Why My Favorite ‘Private Equity’ Sector is under Selling Pressure

I’ve been recommending a small sector of private equity called business development companies (BDCs) for many years. These are small-time lenders and specialty-finance companies such as Ares Capital, Apollo Investment Group, Prospect Capital and Main Street Capital that finance small- and middle-sized private companies that want to expand. They get paid interest and fees on their loans and often take equity positions in these private companies. When they go public or are bought out, the BDC profits handsomely.

BDCs tend to pay generous dividends, anywhere from 6-8% a year, thus attracting many investors.

In the past couple of years, they have been popular and beaten the market, as investors searched for higher yields in a low-interest-rate environment. They get knocked down from time to time when they issue new shares or get overvalued.

But now there is a new threat. The Securities & Exchange Commission (SEC) recently issued new accounting rules and reporting requirements to make sure publicly traded investment companies don't underreport expenses related to their investments. Because of this bizarre change of rules, business development companies are being removed from the major indexes, such as Standard and Poor’s (S&P) and the Russell 2000. The S&P removed BDCs in March and the Russell group is expected to drop them onJune 27.

As a result, many institutions and index funds (such as Vanguard) are selling their BDCs, putting pressure on prices.

Meanwhile, the fundamentals of these BDCs look fabulous, with high profit margins, growing revenues and dividends. My favorite, Main Street Capital (MAIN), is a Houston-based BDC that finances family businesses. MAIN has profit margins exceeding 80% and has raised its dividend five times in the past year. What’s not to like? But the stock is down 5% this year due to a new secondary issue and the index problem.

I still think MAIN is a solid long-term investment and should be purchased anytime the stock sells off. While you wait for the stock to move back up, you will benefit from its rich dividend policy. J. Paul Getty said it best in his classic book “How to Be Rich,” “The seasoned investor buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in his stride.”

In case you missed it, I encourage you to read my e-letter column posted last week on Eagle Daily Investor about what a leading economist says about why capitalism is worth defending against Marx Madness.

You Blew It: Dinesh D’Souza Faces Jail Time for a Campaign Violation?

“This administration doesn’t see its opponents as dissenters but as enemies, and if they can’t refute you, they try to lock you up.”

--Gerald Molen, producer, “Schindler’s List”

Will Attorney General Eric Holder and the Obama Administration stop at nothing to silence their critics?

The Feds went after Dinesh D’Souza, the Obama critic whose film “Obama’s America” was the second-highest grossing political documentary, after discovering he had made two small contributions exceeding the maximum allowed by federal campaign finance laws.

On Tuesday, Dinesh D’Souza pleaded guilty to one count of violating the law for arranging $20,000 in campaign contributions to a Republican candidate who was a long-time friend. He is to be sentenced onSept. 23by a New York judge.

Many pundits, including famed attorney Alan Dershowitz, believe that this is a classic case of “selective persecution.”

The violation has been compared to being arrested for jaywalking. In today’s world, if you become a target, the Feds can find a minor violation of a law and make your life miserable.

D'Souza to Appear at FreedomFest

I am pleased to announce that Dinesh will be a keynote speaker at FreedomFest,July 9-12,at Planet Hollywood in Las Vegas, where he will discuss his case at a luncheon onJuly 11. He also will be one of the attorneys defending “American foreign policy” in our popular mock trial. On Fridayevening, he will be premiering his new film “America: Imagine the World Without Her.” Watch the trailer here: www.dineshdsouza.com.

Another speaker who has much to say about this issue isJohn Fundfrom American Spectator. He will be speaking on his new book,“Obama’s Enforcer: Eric Holder’s Justice Department.” The presentation is not to be missed!

Join thousands of fellow freedom lovers at FreedomFest, “the greatest libertarian show on Earth.”