Business Development Companies

Innovation Growth Funds

Lucas Wyrsch

CAFPS Winter Event 24th Nov 2013 Zürich

Business Development Companies or BDCs are a

form of publicly traded private equities in the United

States that invest in small, upcoming businesses.

This form of company was created by Congress in

1980 as amendments to the Investment Company

Act of 1940.

What is a BDC?

What is a BDC?

Hercules Technology Growth Capital Inc (NYSE:HTGC) defines a BDC as follows:

Congress created Business Development Companies (BDCs) in 1980 to provide public

investors another means to invest in the long-term growth of private U.S. businesses.

BDCs invest their capital primarily in small and middle market private companies in the

U.S. Typically, BDCs are structured to originate and hold debt and equity investments

to maturity and can invest across a portfolio company’s capital structure. In order to

qualify as a BDC, companies must be registered in compliance with Section 54 of the

Investment Company Act of 1940. Among other restrictions, BDCs are required to

maintain an asset coverage ratio of at least 200% in order to borrow or pay dividends

and to meet specific asset diversification requirements. In addition, BDCs that are

regulated investment companies for U.S. federal income tax purposes, such as

Hercules Technology Growth Capital, are required to distribute at least 90% of

investment company taxable income to shareholders in order to avoid corporate

income tax on distributed taxable income.

BDCs are High Yielding, Publicly Listed US Venture Capital

Firms without Income Tax

Source: http://www.htgc.com/ INVESTOR RELATIONS - What is a BDC?

BDC Regulation

BDCs must be subject to all relevant provisions of the

Investment Company Act, which

limits how much debt a BDC may incur,

prohibits certain types of affiliated transactions,

requires a code of ethics and a comprehensive compliance program, and

requires regulation by the SEC or Securities and Exchange Commission and

subject to regular examination, like all mutual funds and closed-end funds

BDCs as regulated investment companies must distribute

at least 90 percent of taxable income as dividends to

investors!

BDC Analysis

50 BDCs were analyzed with their annual performance

between August 3rd, 2012 and August 2nd,2013

50 BDCs are divided into three segments:

Big BDCs

Medium BDCs

Small BDCs

The annual performance of all three segments were

measured:

Big BDCs generated 44.9% with a dividend income of $1.60 or 6.5%

Medium BDCs generated 25.7% with a dividend income of $1.38 or

8.13%

Small BDCs generated 1.7% with a dividend income of $0.53 or 4.72%

The Selection of Best BDC

Cretieria for selection of best BDCs

Making safe loans

Do strong businesses

Generating positive cash flows.

Risk Analysis:

Average grade of portfolio

investments along with the

debt-to-equity ratio for each

Risk Mitigation

The best BDCs in managing risk by diversifying portfolio.

BDCs are precluded from putting too many eggs in one

basket.

No loan or equity position can account for more than 25%

of its total assets.

Which BDC has best credit rating?

Could borrow at very low rates.

Banks define interest rates by measuring risk depending

on strength of balance sheet.

BDCs with little debt can borrow more money at lower

rates.

BDCs with low debt

Federal rules say that every dollar of BDC debt has to be

"covered" by two dollars of assets.

A lot of BDCs borrow every dime they can. But others

borrow only when they find a compelling opportunity.

A BDC with no capacity to borrow, doesn't have the same

options that a BDC with more modest debt may have.

If the economy worsens, BDCs with more borrowing

power can take equity stakes in companies that need

financing to weather the storm.

If times are good, they are in the best possible position as

they can take whatever opportunities they want to help

finance serious growth.

Insider Commitment for BDC

Select companies with strong insider ownership as this is

a strong indicator of a BDC's strength.

If board and executives own shares it indicates their

commitment to excel.

Dividends of BDC

Stability shows a company is making loans that are

getting repaid, especially if the company is paying

dividends monthly.

Looking for BDCs that are paying increasing dividends.

Performance of BDC

Above average performance is key!

Invest in BDCs that have delivered consistent, above-

average gains over a long period of time..

The relative strength index would be used

These five BDCs with a performance of 55% outperformed the S&P 500

by 37% !

Cost Basis Dividends Adj. Basis Price Gain

Triangle Capital

(NYSE: TCAP) $24.58 $2.13 $22.45 $29.34 30.69%

Main Street Capital

(NYSE: MAIN) $26.52 $2.32 $24.20 $30.94 27.85%

Fifth Street Finance

(Nasdaq: FSC) $10.51 $1.20 $9.31 $10.81 16.11%

Apollo Global Management

(NYSE: APO) $13.52 $1.98 $11.54 $27.98 142.46%

KKR

(NYSE: KKR) $14.24 $1.63 $12.61 $20.15 59.79%

S&P 500 1,405.87 33.71 1,372.16 1,691.42 23.37%

Performance of BDC

Result analysis (August 13, 2012 – August 9, 2013)

Europe’s largest institutional investor

Insurance companies are Europe’s largest institutional investor

with assets of €7.7 trillion in 2011

Total assets under management in Europe: €15.1 trillion on

December 31, 2011

Banks had lending assets of approximately €46 trillion but are

not considered institutional investors.

Europe 2020

Business is all about innovation and marketing

Europe needs more business, more growth to create more

jobs according to its Annual Growth Survey 2014

The biggest challenge facing Europe's economy is how to

sustain the recovery that is underway.

European Commission’s “Europe 2020” initiative seeks to

deliver a smart an sustainable strategy for growth that will

create a competitive economy with higher employment

EU’s low interest rate dilemma

Swiss Re’s latest sigma study explores how interest rates

affect insurers, and why low interest rates are particularly

strenuous for life insurers

Interest rates have been falling for decades and are now

very low!

Asset liquidity VS asset duration

BDCs listed on US

stock exchanges are

more liquid than

private equity funds!

Insurers Structural Investment Advantage

Private equity offers highest yields but BDC Innovation

Growth funds would offer more liquid + higer performance

Who we are?

Dr. Philippe Beckers

Partner at Bank Architect

CEO, Adepa Asset Management

Former COO of Pictet Funds

Former COO of Safdié Bank S. A.

Dr. Jan Hendrik Taubert

Rechtsanwalt / Attorney-at-Law

Top-Executive Consultant

Personal Coach

Dr. Jan Hendrik Taubert

MD of Swiss Business Club,

Risk manager at TGC Consultants,

Board member of Ravens Power AG,

Manager of Future Power Generation

Lucas Wyrsch

Thank you very much for your

attention!

Any question?