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The bankruptcy of auto-parts supplier First Brands has raised concerns in the market for business development companies (BDCs), which provide loans to small- and mid-sized firms. Investors expressed alarm following the news, with JPMorgan CEO Jamie Dimon suggesting there may be more underlying issues in the private-credit market. BDCs, known for high dividend yields, are experiencing scrutiny amid fears of rising defaults.
Notable BDCs affected include Blue Owl Capital (OBDC), which has a base management fee of 1.5% and a significant portion of net investment income deducted, resulting in underperformance compared to its benchmarks. Similarly, Prospect Capital Corp (PSEC) is trading at a 60% discount to its net asset value (NAV) but has seen its long-term returns stagnate at around 7% over the last decade, with a 20.9% yield serving as a potential red flag for investors.
In contrast, the Liberty All-Star Growth Fund (ASG), which has outperformed BDCs with a 175% total return over the past decade, offers a safer investment option with a 9% dividend yield and is trading at an 11.2% discount to NAV. This suggests that, for current investors, focusing on CEFs may present a more stable return compared to BDCs.
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