How Golub Capital BDC Inc Built a Hurricane-Proof Balance Sheet

Covering the company's history, strategy, and hard numbers.

Jul 7, 2014 at 3:56PM
Golub

Source: Company.

There are finance tycoons who strike a regular person as wildly -- even excessively -- larger than life, and there are those who seem to be earnestly intelligent and, dare I say it, likeable. 

Lawrence Golub -- CEO of Golub Capital BDC (NASDAQ:GBDC) -- is one of the latter. 

He rose from humble beginnings and describes himself as shy, and yet he has three degrees (an AB, JD, and MBA) from Harvard, where he was also recognized as a Baker Scholar at the business school and served as an editor on the Harvard Law Review

After embarking on a career in mergers and acquisitions and debt restructuring, he took a few years away from finance to become a White House Fellow focusing on health care and policy. Today he is still deeply involved in charity, civics, and science, including a deep interest in Parkinson's Disease and stem cell research. He even funds a fellowship for physicists at Harvard.

See what I mean? Impressive and also... nice. 

After the White House, he briefly worked for another company and then decided to start his own firm: Golub Capital. Opening shop in 1994, his first fund had a modest $20 million in capital, the deals were small, and, in Mr. Golub's words, "there was no proportionality between the hours of aggravation and the dollars of profits for the general partners."

Over time, however, Golub established a solid track record, and by 2000 the firm had grown to manage a couple hundred million dollars.

The Dot-Com Turning Point 
Golub did well during the dot-com bust, and the fund's performance led Mr. Golub to consider a new business idea: Instead of doing traditional private equity, Golub would focus exclusively on providing mezzanine debt to private equity-sponsored companies. 

In other words, the firm became a lender to companies backed by private equity firms, instead of just another investor. 

It was a lucid move. During the dot-com downturn, financing dried up -- not as badly as it would during the financial crisis, but enough to make a difference to the average mid-sized company. Not only would Golub provide much-needed liquidity where banks and other lenders feared to tread, it would do so in a smarter way: by building long-term financing partnerships and making solid, even conservative investments. 

"We were going to be 100% dedicated to being the best lending partner a private equity partner could find." Lawrence Golub 

Over the coming decade, Golub expanded on its core business by developing strengths in a wider range of financing options, providing more flexibility for potential borrowers and better loan structures for each company's long-term health.

The Financial Crisis: Making a Mark 
Golub's diligent, long-term focus -- and dedication to keeping the loans it made on the books -- paid off during the financial crisis, when many competitors were forced to shutter their lending activities. According to David Golub, the company's president, their peers suffered not only due to the depth of the crisis but because of their reliance on short-term or hedge-fund financing. 

Golub, on the other hand, sported a conservative portfolio that easily weathered the crisis and a "hurricane proof" balance sheet.

Thus, even though the firm's overall loan volume fell, the company aggressively expanded and gained market share over the course of the recession.

Golub Capital BDC
One of those expansion strategies took the form of Golub Capital BDC, which was founded in 2009 and went public in March 2010.

The BDC is a closed-end, listed fund that follows the overall Golub strategy: Provide financing for solid, middle-market companies. Focus on the long-term health of borrowers, keep loans on the books, and stay disciplined in terms of quality.

The firm's discipline is reflected in its dividend, one of the lowest in the industry. Recently Golub's investment managers have also been hunkering down into higher-quality assets and one-off loans -- so much so that they aren't even earning a full fee anymore.

Like many investors in this environment of low yields and high liquidity, you might be tempted to pass over Golub in favor of the BDCs that can provide jucier returns.

But maybe there's something in Golub's secret sauce that's worth a longer look. 

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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.

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