What Millennials Should Know About BDCs
Adults under 30 years of age — the millennial generation — are faring well financially and enjoying their earnings, but only 26 percent report that they own any stock, according to a recent Bankrate survey.
The biggest reason for ignoring the stock portfolio is the misconception that millennials do not have enough money to invest. The second reason for neglecting to invest is not knowing anything about stocks.
A lack of trust in the market is also preventing many from believing investing is a viable way to save for the future. According to a Capital One Investing survey released by CNNMoney, 93 percent of millennials reported both a distrust of the market and a lack of investing knowledge.
Bottom line: Millennials are fearful and not knowledgeable enough to invest.
Fortunately, millennials have many resources at their disposal to learn about investing basics and pick out a few high-performing investments. Online wealth management firms and DIY brokerages are some good starting points. These resources and tools can help younger investors learn about investing strategies and create a starter portfolio that carries them through their working years. Learning about business development company (BDC) investments can be extremely valuable for a young investor who wants to build or diversify his or her portfolio.
How Millennials Approach Investing
In its “Millennials and Money” white paper, Merrill Lynch revealed the results of its Young High Net Worth Insights Survey, which shows 65 percent of young investors take the same approach as their parents. These investors are independent and skeptical, which means they may be more inclined to make carefully researched choices and be somewhat conservative in their approach. This generation makes thoughtful spending decisions and may not be so eager to indulge in luxury purchases or seek out high-risk stock trading activities.
BDCs might be the ideal option for millennials who want to diversify with minimal risk and also get the highest returns on their portfolio. Here are some important things millennials should know about BDCs:
Getting Started with BDC Investments
A BDC is a publicly registered company that provides financing to small and mid-sized businesses. BDCs fund other companies and answers to their own board of directors. BDCs were created by Congress in 1980 as an amendment to the Investment Company Act of 1940. These companies represent a very transparent portfolio of lines which are open for public trading without any restrictions.
People who choose to invest in BDCs are, therefore, investing in the performance of an company. BDCS can pay high dividends because they take on risks in the process of buying stock in various companies. Since their own portfolios are so diverse, well managed BDCs can show a steady track record of success, which in turn makes them even more appealing to individuals looking to build a portfolio.
Why BDCs Are So Attractive
One of the biggest reasons BDCs are so attractive to millennials is because they provide for diversification of funds. Instead of investing in a single stock or company, the investment is spread across dozens or hundreds of small businesses, which means the risk level is similar to that of a mutual fund. Young investors seeking out lower-risk opportunities may find BDCs to be among the most attractive options for their portfolio. For an idea of what this diversification looks like, take a look at this graph from my company, Saratoga Investment Corp. This is from our recent Q3 FY Earnings Report:
Saratoga Investment Corp.’s, recent Q3 FY 16 earnings report
Another benefit of BDCs is the tax advantage. Like real estate investment trusts (REITs), BDCs are not taxed at the corporate level under certain conditions, which means they provide investors a higher dividend yields than other investments. This is one of the reasons why BDCs work so well in retirement accounts — when a shareholder holds a BDC in an IRA, they enjoy the benefit of tax-exempt gains and cash distributions.
Identifying the Right BDCs
Millennials exploring the idea of investing in BDCs need to do some due diligence to make informed decisions. Since these companies are transparent about their schedule of investments, it’s a good idea to review this information closely and focus on BDCs that are investing in companies with a positive cash flow. BDCs investing in fast-growing companies and market leaders are more likely to provide investors with high returns.
Young investors do not need to shy away from the prospect of investing when they arm themselves with valuable knowledge about stock trading and learn about attractive investment opportunities such as BDCs. With careful planning and an accurate assessment of risk, many millennials will find BDC investments to be an extremely valuable addition to their portfolio.
Photo Credit: Flickr/GotCredit
Originally published on ChrisOberbeck.com
ABOUT THE AUTHOR
Christian Oberbeck is the Chairman and Chief Executive Officer at Saratoga Investment Corp., a publicly traded business development company. Mr. Oberbeck brings over 25 years of experience in leveraged finance, from distressed debt to private equity, to his position. Chris Oberbeck’s wealth of experience stems from originating, structuring, negotiating, consummating, managing and monitoring investments in a wide variety of middle-market businesses. In addition to his aforementioned roles, Mr. Oberbeck is the Managing Partner of Saratoga Partners, a middle market private equity investment firm, and has served on its investment committee since 1995.