BDCs: Better Don’t Choose?

Another strategy that trades income for capital returns

August 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Business development companies (BDC) funds feature 10%+ annual fees
  • Investors seem to be willing to accept these for similarly high dividend yields
  • However, these funds underperform the S&P 500 significantly

INTRODUCTION

The most expensive investment funds tend to be ones focused on private asset classes like private equity as there are fewer regulatory disclosure requirements, but there are also some excessively expensive ETFs and mutual funds that trade public securities. We recently came across the VanEck BDC Income ETF (BIZD) that charges 10.92% per annum.  The ETF issuer explains that the management fee is a mere 0.40% and that the other 10.52% can be attributed to acquired fund fees and expenses.

BIZD is managing more than $600 million of assets, so investors seem to be comfortable with paying such high fees, which is unusual given the usually fierce focus on paying the lowest fees possible.

In this research article, we will explore business development companies (BDC) funds.

WHAT ARE BDCs?

BDC funds offer exposure to diversified portfolios of publicly traded business development companies like Ares Capital, Owl Rock Capital, or the Blackstone Secured Lending Fund. These companies invest equity in and lend to private companies that are rated below investment grade or not rated at all. Stated differently, they provide capital to highly risky companies.

The BDC companies are typically externally managed by a fund manager that charges management and performance fees, which means a BDC fund like BIZD represents a fund-of-fund that features a double layer of fees.

In the US, there are two ETFs and one ETN offering investors exposure to BDCs. Both ETFs show expense ratios of larger than 10%, while the ETN only highlights its management fee, but that is misleading as its underlying securities are the same and it incurs the same expenses. We will ignore the PBDC ETF in the remainder of the analysis given a track record of less than one year.