When it comes to investing in BDCs, assessing management is the most important and part of my "qualitative" measures for valuing BDCs, and is the primary difference between companies that outperform (pricing and operating results). Management is in direct control of managing the capital structure and dividend policy as well as adjusting the expense structure including management fees. Higher quality BDCs are actively trying to increase returns to shareholders through 'doing the right thing' such as updated/revised fee agreements that protect shareholders during capital losses, not issuing shares below net asset value ("NAV"), meaningful share repurchases when trading well below (10% or more) NAV per share, waiving or reducing management fees to protect dividend coverage rather than cutting distributions, conservative accounting policies that appropriately mark assets closer to comparable market valuations as well as amortizing fee and onetime income to smooth out earnings and fees paid to management.
The reason that this series covers BDCs with longer operating histories is because it is easier to assess the quality of management using "quantitative" results such as the ones listed below. However, it is important to point out that lower performing BDCs such as Apollo Investment (NASDAQ:AINV), BlackRock Capital Investment (NASDAQ:BKCC) and Gladstone Capital (NASDAQ:GLAD) have either replaced management and/or taken major course correction steps in the last two to three years. The only changes to dividends over the last few quarters is a monthly dividend increase for Main Street Capital (NYSE:MAIN) and decrease in the quarterly dividend for KCAP Financial (NASDAQ:KCAP).
Source: Seeking Alpha
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