Shares of Gladstone Investment Corporation are up 24% thus far in 2016, almost five times the return of the S&P 500. Not bad for a business development company (BDC). GAIN CEO David Dullum said the outsized results are a reflection of the BDC’s unique strategy of providing equity along with secured debt in the buyout of private companies, often with participation of management teams. The secured debt generates current income to pay monthly distributions to GAIN stockholders and the equity portion generates potential capital gains from the sale of appreciated equity securities. Also attractive to investors is GAIN’s common stock yield of about 9% based on its 75 cents per share annual dividend paid monthly. The company has paid 132 consecutive monthly distributions since inception and has increased distributions by over 29% in past 5 years. “That’s grown pretty significantly over the past five years,” said Dullum. “For someone looking for yield, and because of the equity components of the transactions that we typically are involved in, there is further upside as a result of that.” Dullum said the BDC is currently invested in 36 companies across 19 states and 17 industries. The average investment size ranges from $5 million to $30 million. Right now the portfolio holds investments in sectors including light and specialty manufacturing, specialty consumer products and services, and industrial products and service. For example, GAIN purchased Brunswick Bowling last year. Dullum said the buyout market is somewhat “frothy” now with multiples being fairly high, but since Gladstone is a long-term investor he does not feel pressured to bid up for a company. Of course, valuations are high partly due in part to the Federal Reserve’s decision to keep interest rates low. If rates rise, Dullum said it would not hurt Gladstone as much as other BDC’s because it does not use straight debt when buying companies. “Private equity firms are trying to put money to work and that is driving prices up,” said Dullum. “They often depend on leverage to get deals done, so to the extent that the leverage costs on typical private equity deals starts to rise that might moderate what people are trying to pay and the levels may come down into a range that makes some sense.”
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