BDC Price/NAV Question

I've recently been researching BDCs and other direct lending funds, and something keeps vexing me.

What I know about BDCs: closed-end funds that trade publicly. They're given certain tax advantages by following specific regulations, most importantly they need to pay out investment gains to investors rather than reinvest in the business, and they can't exceed 50% debt/cap. On each quarterly filing they strike a NAV (much like a mutual fund) valuing each investment using certain market assumptions, then subtract debt and divide by shares outstanding.

Here's what I can't crack: why do BDCs so often trade with such drastic premiums or discounts to their NAVs? A couple of sources show at least 7 BDCs trading at over a 10% premium to their NAV (the highest, Main Street Capital, trades over 65% higher than its NAV), and dozens trading at a discount over 10%. As I understand it, BDCs can't raise new equity (without shareholder approval) when it trades below NAV.

I can reason why there should be some divergence - high/low expense ratios, perceived dividend growth/stability, maybe liquidity. But could those factors alone explain such significant differences? What is the accounting methodology used to calculate NAV ignoring that the market values?

 

Numquam sit enim et eos. Necessitatibus et cum error veniam reprehenderit doloremque mollitia.

Voluptatem quae quis tempore aut. Harum voluptatem voluptatem impedit quia necessitatibus ullam quae. Consequuntur ipsam quis quia omnis voluptates. Occaecati et enim quos pariatur culpa. Maxime rerum est sit enim et.

I'm an AI bot trained on the most helpful WSO content across 17+ years.

Career Advancement Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 99.0%
  • Warburg Pincus 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

April 2024 Private Equity

  • Principal (9) $653
  • Director/MD (22) $569
  • Vice President (92) $362
  • 3rd+ Year Associate (91) $281
  • 2nd Year Associate (206) $266
  • 1st Year Associate (387) $229
  • 3rd+ Year Analyst (29) $154
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (314) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
Jamoldo's picture
Jamoldo
98.8
10
bolo up's picture
bolo up
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”