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Barron's dug in some on business development companies (BDC). BDCs sort of straddle the line between public and private securities. The assets held by BDCs are usually private but the BDC wrapper offers market liquidity, there's no gating or the like as is the case with interval funds or other vehicles. Similar to closed end funds, the market price should be expected to trade at a premium or discount to NAV.

A complicating factor to the pricing though is how the underlying portfolio is marked to market. Like private equity/credit, it's not a daily process. One of the comments on the article (always read the comments) noted that the discount or premium to NAV is the real price, not the marking to market process. There's certainly something to that. There is also leverage involved that, as a generalization, is a little more than the typical leverage used by closed end funds.

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Holding on to BDCs is a tough way to make a living, they are volatile. Interestingly or surprisingly, they held up pretty well on Friday as the stock and crypto markets got smacked down pretty good. 

Here's a quick inventory of how they did in 2022.

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It's a mixed bag with some pretty big declines mixed in, they got caught up in kind of in a crisis, all correlations go to 1 sort of way.

The biggest attraction to owning BDCs is the yield which tends to be mostly in the 11-13% range with FSK, a KKR product, being singled out in the article as now yielding 19% due to a 34% YTD decline. Down 34%, BDCs are a tough way to make a living. Generally, these are far more volatile than broad equity index funds. 

Above is a comment about BDCs getting hit when correlations go to 1. In 2018's Volmageddon, BDCs held up a little better than equities, in the 2020 Pandemic Crash they got hit harder than equities and you can see above 2022. BDC's do have a vulnerability to volatility events but moreso to credit events. 

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Copilot gave me those names as being around in 2008 and still trading today. The hover captures the 2009 low point for drawdowns, very big declines. An analyst quoted several times throughout the Barron's article recommended a newer BDC, Palmer Square Capital BDC (PSBD).

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I certainly don't know more than the analyst, he may be 100% right, no idea, but it is easy to observe that this space is a tough way to make living. 

Realistically, the typical investor or advisor is not going to be a position to evaluate the underlying portfolios in these. That doesn't mean the typical investor or advisor can't find and digest how analysts evaluate the underlying portfolios. Ultimately, to buy one of these is to have faith in the manager and be comfortable outsourcing the portfolio construction. Since I can't find another spot to make this point, these are generally very expensive. 

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This last chart tries to pull out some of the less volatile BDCs and you can see they've been hit hard. Copilot seems to blame this current decline on slower deal flow and tariff uncertainty. Ehhhh, maybe, not sure. Throwing the S&P 500 in there gives some context for volatility and the TLT comparison shows that whatever is going on, BDCs are not now behaving like long duration assets like they did in 2022. Portfoliovisualizer says that BIZD and TLT have a slight negative correlation. 

IRL, I have no plans to add this kind of volatility into client accounts but this was a worthwhile exploration to try to learn a little more about the space. Off the top, a way to use BDCs in a context we discuss here might be a strategy that tries to barbell a lot of yield out of a 10% slice of the portfolio. Putting 1-2% each into a bunch of different high yielders that might have different fundamental risk factors seems plausible. Even after the absolute carnage of 2008, they eventually recovered.

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I would expect bank loans and BDCs to have similar vulnerabilities but the reactions wouldn't have the same magnitude. NLY is a popular mortgage REIT that probably overlaps somewhat on risk factors to BDCs and if you look at a chart, it too has been a very rough ride over the years. I have no plans to add mortgage REITs either.

How does the data look to you on the correlation matrix? Maybe this 10% hell bent for income sleeve can be divided into three groupings. Selling volatility like the derivative income funds which might include the autocallable mania that might be coming, leveraged loans which BDCs can fit into and maybe royalty streams like MLPs or shipping stocks (not really a royalty). Where this is about portfolio theory, there are some ways to diversify/mitigate the consequences of idiosyncratic risks. 

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