Episode 35

JANUARY 25, 2022

Jason Breaux on business development companies

Jason Breaux, Chief Executive Officer of Crescent Capital BDC and managing director of private credit at Crescent Capital, discusses business development companies and their ability to provide income replacement in investor portfolios.

Steve Peacher: Hi everybody thanks for dialing in to this episode of “Three in Five,” and this is Steve Peacher at SLC Management and I’m really excited today to be with Jason Breaux. Jason is a managing director at Crescent Capital, he's also the chief executive officer of their BDC the Crescent Capital BDC that goes by the ticker CCAP. Jason, thanks for taking a few minutes.

Jason Breaux: Thanks Steve, great to be here.

Steve Peacher: So, first, I just wanted to not everybody who listens to this may know what a BDC is a business development corp., can you just explain everybody, what is a BDC and you know if you think of as an asset class how's it how's it growing over time?

Jason Breaux: Yeah sure BDC stands for business development company. BDC is a type of closed end fund that makes loans to medium sized companies, those loans generate income and that income is passed on to investors in the form of a 1099 dividend. BDCs are essentially yield vehicles for investors given their structures require them distribute over 90% of their profits to shareholders, just like REITs. The majority BDCs are publicly traded, including Crescents BDC., which, as you said, trades on the NASDAQ on ticker symbol CCAP or C-C-A-P. They were created by Congress in 1980 to fuel job growth and assist U.S. businesses in raising capital grow their own businesses. And when you think about the U.S. middle market that's made of approximately 200,000 companies which employ over 50 million workers. So the U.S. middle market if we're its own country would actually be the third largest economy in the world, BDCs have played a big role in the growth of this market, offering financial solutions to tens of thousands of these companies over the years.

Steve Peacher: So, if you think about BDCs you know you see both retail investors, as you say, many are publicly traded, not all, there are also institutional investors in these, especially with private BDC, so when you think of BDCs from an investor standpoint, you know why would someone invest in a BDC? What are the pros and cons of putting money either as an institution or as an individual?

Jason Breaux: Yeah there's definitely positives and cons as well Steve. But in an environment where rates are low many investors are looking for income replacement in their portfolios, BDCs are a great addition and great diversifiers given underlining BDCS portfolios tend to have 50 to 150 plus unique portfolio company investments. BDCs offer the potential for very compelling yields, upwards of 700 basis point premium to treasuries today, and the ability for both retail and institutional investors to access private credit in a liquid structure or an illiquid structure. Many BDC loans are floating rate as well, so yields will go up as rates rise. Currently nearly 100% of CCAPs loans are floating rate. For retail investors BDC stocks provide access to large, alternative asset manager platform source deals that were historically reserved for pension plans, sovereign wealth funds, high net worth investors and other institutional channels. BDCs are invested in the same loans that these large platforms private funds are invested in, which itself democratize access to private credit. If you're investing in a good lender the stock should maintain its value over time and you should have an attractive annual dividend yield of 8 to 10%, generally. CCAP has a 9% dividend yield based on last Friday’s closing stock price and that's including a series of special dividend we announced on the heels of a strong performance in 2021, so the income potential is meaningful. Lastly, BDCs are regulated and transparent. They publicly file regular reports on their performance and must meet a number of statutory portfolio diversification and other requirements. Equity research analysts cover a broad swath of public BDC is like CCAP so investment performance and alignment with stockholders like attractive fee structures and insider ownership are of paramount importance and increasingly scrutinized, which is a good thing for the industry as it continues its that maturation. On the con side, as with any public stock, there are a handful of risks to consider before investing in a BDC. First, given BDCs are primarily in the business of making loans, poor credit selection can lead to negative outcomes, including portfolio companies being put on nonaccrual and potentially turning into realize losses, which we obviously try to avoid at all costs. And along those same lines and BDCs past history of credit selection and overall performance is no guarantee of future results. Second, and somewhat related to the nonaccrual point is mark to market volatility. During periods of dislocation BDC managers can experience significant unrealized write downs across their respective portfolios, which can result in a reduction in net asset value per share, which is generally the guideposts for BDC stock prices.

Steve Peacher: Now, you mentioned that one of the risks is that the underlying companies could underperform, could go on what you called “nonaccrual status.” You know where I guess we're still in the middle of this multi-year pandemic, which create a lot of stress on some smaller companies. And so, when you think of the BDC universe that has targeted these mid-sized and smaller companies across the U.S., how has the credit quality fared through the pandemic?

Jason Breaux: Yeah Steve that's a great question. You know BDCs overall have demonstrated impressive resiliency following the onset of the pandemic. Most portfolio marks are now largely back to or above pre Covid levels. Now there is that period of pronounced potential stock price volatility during that period of time, but I think it's a testament to the strength of the of the U.S. economy and the U.S. middle market in that these businesses have come back strong.

Steve Peacher: Well that's great it's an interesting sector and, as you mentioned in the answer to one of the questions there's a lot of it's amazing how much yield is still on the sector for many BDCs relative given, given the relatively low level yields we see in the marketplace, when you look at certainly treasury bonds or almost any other sector. So, final question having nothing to do with BDCs but on the personal level, you got your undergraduate degree at Georgetown, you got a graduate degree at Darden at the University of Virginia, so my question is and as you know, I’m a bit biased on this, but what did you enjoy more going to school in DC or in Charlottesville?

Jason Breaux: I enjoyed both quite a bit, Steve. What was nice about Georgetown was being in the capital of the country and really being a part of a very vibrant city. Between undergrad and business school, I actually spent two years working in New York as a financial analyst in an investment bank and I was working at 80 to 100 hour weeks so, what's great about going back to Charlottesville was slowing things down a bit and trying to enjoy life a bit more.

Steve Peacher: Yeah well that's, you definitely need to escape after those two-year analysts’ programs, that's for sure so. Well, listen thanks for taking the time I appreciate it that was a quick and interesting summary of BDCs I hope everybody enjoyed it, so thank you everybody for tuning in to this episode of “Three in Five.”

Jason Breaux: Thanks very much.

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