The Secret to Golub Capital BDC Inc's Success

The secrets to successful long-term investor from private equity tycoon Lawrence Golub.

Jun 26, 2014 at 12:08PM

Source: Golub Capital.

You might never have heard of this low profile private equity titan, but he has a lot to teach you about investing. 

In 1994, Lawrence Golub started his namesake fund, Golub Capital, with just $20 million under management. Over the last 20 years, it has grown to over $10 billion, and he's made it through not one but two downturns with barely a scratch.

In fact, Golub Capital increased its market share through the financial crisis -- and please note, that's as a lender. To middle-market companies. During a recession.

That kind of resilience is impressive by any standard. So what are the secrets to his success? 

Pick a Philosophy
Lawrence Golub has a clear-cut lending philosophy. His fund focuses only on strong businesses in a particular size range, and he pays particular attention to long-term outcomes.

"We're enterprise value-oriented and we think like an equity investor thinks. At the same time, we design capital structures that keep our borrowers out of trouble." 

Seems simple enough.

Of course, it's relatively easy to come up with a sound investing strategy -- like anything that's good for you, sticking with it is generally the hard part. 


Flickr / tent86.

And Stick With It, Even if Everyone Thinks You're Nuts
Discipline and focus is about being willing to go your own way.

For example, Golub Capital's captive BDC, Golub Capital BDC (NASDAQ:GBDC), pays out one of the lowest dividends among its competitors. Its managers aren't even taking a performance fee right now, which is a pretty big deal in the alternative investment world.

Are they really bad at what they do? Actually, just like it did during the financial crisis, Golub Capital made a decision to stick to a proven investment philosophy at the expense of short term gains. Instead of pursuing higher-yield (read: riskier) loans to juice returns, Golub Capital is investing in high quality companies and favoring more conservative financing structures.

This means going its own way instead of following its competitors -- even if investors, the media, or the market don't like it. 

Sticking to your own beliefs instead of going along with what others are doing is one of the hardest things to do as an investor. It can make your performance look weak in the short run, and it can make you feel like your ideas are unpopular, or even silly. 

Be like Lawrence Golub: Know why you're doing what you're doing, and have the discipline to stick to your guns. 

Keep Your Eye on the Long Term
If you're like most Fool readers, you prefer fundamental analysis to technical analysis and investing to trading. This requires a deep understanding of your time horizon, and a willingness to look past the highly publicized day-to-day movements of the market.  

Golub Capital has a strategy of holding onto its loans instead of selling them in the market. It's also a long-term strategy, and it makes the company much more careful about what it finances.

"It's not about how much volume did we originate or how much fee income we earned, it's about the distributions we made and what our credit losses have been. That way we all get a piece of what the income is going to be next year and the years that follow. Not only do we eat our own cooking, but we keep it in the freezer and have it again and again ... year after year. And if it doesn't taste good, we're all going to remember that." emphasis my own 


Flickr / King.

Buying companies you want to hold onto for a long time takes a lot of the noise out of an investing decision and forces you to look at the really important, big picture issues. 

For example, instead of musing about what a stock is going to do in the next quarter or how the market will move next week, you need to be thinking in periods of five and ten years. Instead of worrying about your portfolio's performance last month, or even all of last year, you're thinking about the stability and health of your investments in increments of years and decades. 

Stepping back like this lets you look at a company not just as an investment, but as a business, with strengths and weaknesses, potential opportunities and flaws, and an ever-changing marketplace. 

So, be like Lawrence Golub and take the long view: Know your philosophy, stand your ground, and buy companies that you actually want to keep. 

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Editor's Note: The original article stated that the fund is no longer owning all of the equity in the referenced securitization. Golub Capital did not sell any of the underlying ownership of the loans. The Fool regrets the error.

Anna Wroblewska has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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