Entering a BDC into Riskalyze
The best way to find a Business Development Company (BDC) is by searching its name in the "Add Investment" field as noted by the animation below.
Modeling these investments poses a unique challenge because they are illiquid and do not have readily available pricing data. Further, utilizing a BDC’s NAV as “price history” has serious and ubiquitous consequences from a risk assessment standpoint. Other than creating a low-resolution representation of price volatility, it further simplifies the generic risk profile of Non-Traded BDCs to that of a stable-value product whose value is little changed over time. As one might suspect, the realities of assessing the underlying risks of Non-Traded BDCs are complicated and their risk profiles range from low to high risk. As a result, Non-Traded BDCs in Riskalyze use a proprietary calculation to determine the risk profile presented.
Non-Traded BDC Methodology Overview
For traditional investments in Riskalyze, we incorporate daily or monthly price data, as appropriate, and dividends from a full market cycle; January 1st, 2008 to the most recent market close. As previously stated, Non-Traded BDCs do not have regular pricing data, even if they strike monthly NAVs, and most did not exist prior to January 1st, 2008.
Our proprietary methodology for calculating the risk profile (return and volatility) for Non-Traded BDCs assesses the following criteria:
- Short-Term Liquidity: As a measure of near-term volatility, our methodology penalizes low liquidity levels.
- GAAP Earnings Payout Ratio: A measure of both NAV stability and dividend sustainability, BDCs that exceed 100% well after inception are penalized.
- Return on Assets in Relation to the Weighted Cost of Debt: A measure of levered loss, BDC’s where the use of leverage results in a negative contribution are penalized.
- Trends in Sources of Distributions Since Inception: A long-term indicator of dividend sustainability, BDCs that rely too heavily on Capital Gains and Fee Waivers to support their dividend well after inception are penalized. Conversely, increasing reliance on Net Investment Income (NII) to finance dividend payments is rewarded.
- Taxable Income Payout Ratio: A different but equally important measure of both NAV stability and dividend sustainability, BDCs that exceed 100% well after inception are penalized.
- Analysis of Portfolio by Asset Type within the Capital Structure: A measure of hedging risk via a capital structure, BDCs that hold large portions of senior debt are rewarded whereas BDC’s that hold large portions of equity or subordinated debt are penalized respective to their relative percent allocations and place within the capital structure.
- Leverage: The use of leverage on a BDC’s balance sheet can accelerate both losses and gains which results in higher underlying volatility. BDCs that utilize extensive leverage are penalized.
- Interest Coverage Ratio: BDCs that can easily service their debt are rewarded whereas BDCs that cannot are penalized.
- Dividend or Distribution Yield: For many of the alternatives on our platform we rely heavily on the stated dividend yield for our return expectation. BDCs with stable or increasing dividends are rewarded, while alternatives with unstable or stopped distributions are penalized.
- Fees: Fees can play an important role in long-term performance and sustainability, especially in illiquid assets, eroding gains over time. Higher than average fees are penalized whereas BDC’s with lower than average fees are rewarded.
Again, traditional investments within Riskalyze incorporate daily or monthly price data, as appropriate, and dividends from a full market cycle; January 1st, 2008 to the most recent market close. In our analysis, we found that utilizing a BDC’s NAV as “price history” over-simplified the generic risk profile of Non-Traded BDCs to that of a stable-value product whose value is little changed over time. The criteria above provide a more encompassing view of the risk profile for these types of investments.