Is Golub Capital BDC Worth the Price?

Is Golub Capital BDC a buy? And at what price?

Jul 28, 2014 at 1:48PM
Golub

Source: Company.

Let it be said that I like Golub Capital BDC (NASDAQ:GBDC): It has a consistent, coherent strategy, a strong track record (both as a private fund and a BDC), and its managers have localized a strong niche.

In my mind, these are factors that all make for long-term success.

Price, however, is a factor to consider. Suppose you like Golub as an investment. Is it well-priced compared to its peers? Is it better to wait?  

Let's investigate. 

It trades at such a premium! 
Golub's shares trade at a nearly 13% premium to book value, and except for a few bumps in the dark days of 2010, the company has pretty much always traded well above it (please note: technically, we should be calling it net asset value, or NAV, but for the sake of simplicity I'm going to stick with the term book value).

GBDC Price to Book Value Chart

How does that compare to peers? And why is it happening? 

The importance of fees 
Take a look at Golub's price premium and fee structure compared to a few peers: 

 

Price to book value premium

Management  fee

Golub Capital BDC

12.9%

1.375%

Ares Capital Corporation

6%

1.5%

Apollo Investment Corporation

1.4%

2%

Fifth Street Finance

0.3%

2%

Golub trades much higher than its competitors, but it also charges a low management fee (all these funds compute fees the same way, so you're seeing an apples-to-apples comparison here). Generally speaking, lower fees beget higher returns, so even though Golub's is a conservative strategy, you could argue that you're getting more bang for your buck with this setup. 

More importantly: the issue of trust 
Another aspect of this is trust: Is Golub a good manager? Historically, I think we can say that it is. Golub Capital (parent of Golub BDC) came through the financial crisis is great form, and that's because of its conservative strategy and investment management abilities. 

In other words, the shares can trade at a premium because investors know that, on some level, they're getting a premium product. 

Are investors telling Golub to raise more money?
There's also the possibility that Golub's premium contains information about what shareholders believe about the company's actions. As my colleague Jordan Wathen pointed out, Golub is very strong on protecting its shareholders when it raises new funds, which could explain the level of trust.

You could even think of it as a sign that investors want Golub to raise more money. Raising shares at a price above book value would help the company make new loans and grow that book value. If Golub were to issue more shares at today's prices, it would get $1.13 to invest for every $1 of equity that it sells. 

Golub's last two share offerings were above the company's book value -- think of it as a sign that investors think the company can make really good use of that extra few cents per dollar. 

So when do I buy? 
Assuming you're willing to pay a premium to have a Golub-managed BDC in your life, the question becomes: Do I buy now or wait? 

In Golub's last share offering, the share price dipped a little bit. It's entirely possible that Golub will issue more shares in the coming year as it works through its investment capital and grows its portfolio, so we could see the same thing happen again.

I like sales, personally, so maybe it's worth keeping an eye out for any dips related to new share offerings.  

On the other hand, if I'm really patient, I might even wait for credit availability to start waning. Right now, the market is very supportive of leveraged lending and the pursuit of yield, so Golub might be getting a little bit of lift in its share price through that enthusiasm. 

I'm not convinced that current conditions will last.

When things go the other way, it's entirely likely that Golub's share price could suffer a little bit as short-term or fearful investors head for the exits. And that, as the old buy-low/sell-high wisdom dictates, could be a very opportune time to buy. 

In the end, of course, the price now versus a few months or one year from now is probably less important than the fact that, if you're looking for a BDC with a bit of yield, Golub should be a strong contender for your investment dollars.  

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