Business Development Companies carry unfavorable risk-reward profiles
The bear case argued against Business Development Companies (BDCs) is that they offer an asymmetric downside risk and tend to degrade book value over time through credit losses.
The argument
The guest argued that BDCs are retail-targeted yield products prone to blow-ups, where investors make 12% if everything goes right but risk losing 40% if credit conditions deteriorate. He noted that he avoids the sector entirely, with the exception of high-quality operators like Ares.
The thesis, stress-tested
✓ What validates it
- ✓An increase in non-accruals and credit write-downs across major BDC portfolios
▸ Risks discussed
- ▸A prolonged period of low default rates could allow BDCs to continue paying high yields safely
Hear it yourself
"I don't love the the risk reward ratio. Like, if if everything's fine, you make 12% and everything's not fine, you're down 40%. So I just don't love that setup. Like, that's and it seems like they degrade book value through time through losses."
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