What are the key sources of competition for Golub Capital BDC, (NASDAQ: GBDC ) and how does it set itself apart? In this installment we'll consider the competitive environment Golub operates in and its sources of competitive advantage.
The Competitive Landscape
As a stable source of financing in a market with high liquidity and declining bank presence, Golub is in a good place. But that doesn't mean that it's alone.
Golub doesn't just compete with other BDCs for deals. The company's competitor base includes other public funds, private funds like hedge funds and private equity firms, commercial financing companies, and banks.
However, other BDCs do represent a source of competition. The two big BDC gorillas in the room are Ares Capital Corporation (NASDAQ: ARCC ) and Prospect Capital Corporation (NASDAQ: PSEC ) . Neither looks exactly like Golub, but due to their size and scope they shouldn't be ignored.
Ares is the most significant force in the BDC realm in terms of size. Like Golub, the company is also focusing recent activities on secure financing; 82% of its first quarter commitments were first-lien senior secured debt. It represents a major player in the space, with total assets of $8.2 billion at the end of the first quarter (by comparsion, Golub's portfolio was $1.2 billion).
Prospect is another big player, with a first-quarter investment base of over $6 billion. The company provides financing and likes to take debt and equity positions in target firms, but it also does a whole lot more. Prospect is extremely diversified, and while it plays in the same space as Golub, it isn't nearly as focused.
How Does Golub Set Itself Apart?
Like private equity firms, BDCs will compete most strenuously for deals when the value of a deal is high, the supply of deals is low, and when liquidity is strong. Of course, great deals will always get more bidders -- but the definition of a great deal might vary quite a bit.
For example, Golub is pretty strict in its lending activities, and it isn't looking for ownership stakes. That automatically means that Golub won't go after a lot of deals that other BDCs and private equity funds might find attractive. Instead, Golub has set itself up to look much like the banks of yore -- a conservative lender that keeps loans on its books.
Because competition on this front is declining as banks withdraw from the market, Golub is well-positioned as a source of finance. The returns might not be as spectacular as a multi-channel shop like Prospect, but the demand is there and the outside options for companies are declining. For stable companies looking for additional capital, Golub could represent a lender of choice.
What Could Change?
If the demand for financing drops or supply increases -- which could happen if economic conditions worsen or if banks start entering the space with their own BDCs -- Golub's competitiveness could decline.
How to avoid it? Golub focuses on differentiating itself from other BDCs, and from this vantage point it looks like the company has been very successful. While Golub might see better and worse times, like any business, it has a lot going for it: Golub has a specifically targeted strategy that is in demand, and it has a history of fulfilling that demand successfully and at a competitive cost.
On a certain level, Golub might even benefit from increased competition. Fitch, the ratings agency, suggested recently that rising competition among BDCs could have a long-term effect on the distribution of their credit ratings. BDCs are increasingly financing riskier propositions to set themselves apart, and over the long-term those firms might see their creditworthiness decline.
This is of critical importance to anyone who borrows in order to lend. If Golub, by sticking to its mandate, can maintain a sterling reputation over the long run, its ability to get cheaper money (and thus pass on cheaper rates to borrowers) could be another key in setting it up for long-standing competitive advantage, regardless of how the market might change.
Next time: What are Golub's opportunities for growth?
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