With more than 40 publicly traded BDCs, it's easy for the smaller ones to get lost in the shuffle.
BDCs that specialize in senior floating-rate loans seem to be the most common orphans. Fifth Street Senior Floating Rate (NASDAQ: FSFR) is substantially smaller than Fifth Street Finance (NASDAQ: FSC). Likewise, PennantPark Floating Rate (PFLT +1.03%) is dwarfed by PennantPark Investment (PNNT 1.54%), though a recent acquisition may put them on more level footing.
But it doesn't seem as though investors are really missing out by investing in just one fund, be it the larger "traditional" BDCs or the smaller floating-rate variants. A quick study of their portfolios shows that if you own one BDC under one name, you basically own them both.
Portfolio twins
It's not surprising that BDCs that share managers would tend to invest in the same portfolio companies. But it might be surprising that two BDCs under common management also invest in the same or similar tranches of investments.
A quick check of Fifth Street Senior Floating Rate shows that it has 24 portfolio companies in common with its older brother, Fifth Street Finance. In some situations, the floating rate FSFR owns the first-lien loan, while the "go-anywhere" FSC owns the second-lien loan. (See portfolio company Vitera Healthcare, for example.)
In many other instances, however, Fifth Street Finance and Fifth Street Senior Floating Rate own the exact same loans in the exact same companies. (See The Active Network, BeyondTrust Software, and GOBP Holdings, just to name a few.) In all, Fifth Street Senior Floating Rate shares 24 of its 62 portfolio companies with Fifth Street Finance.
PennantPark Investment and PennantPark Floating Rate have a similar relationship. In all, the smaller PFLT BDC had 19 portfolio companies in common with PNNT. In every instance, the shared investments were identical. If these two companies share a portfolio company, they also hold the exact same investments -- first lien, second lien, preferred equity, or plain ol' common equity.
Making moves
Given similarities in their portfolios, it's curious that the floating-rate BDCs carry lower management fees as a percentage of assets. Perhaps they're a better bet, given so much of the portfolios are duplicated, anyway. In a downturn, what hurts the floating-rate BDC will likely strike the more-traditional fund.
Owners of PennantPark Floating Rate enjoy advance notice of any problem credits. Notably, it's slated to report earnings two days after PennantPark Investment. The Fifth Street-managed funds report on the same day, unfortunately.
But at the end of the day, if you're one who believes in real diversification, you may want to skip on BDCs under common management, even if they have different stated investment objectives. Different packaging on substantially similar portfolios probably isn't exactly the diversification you're probably looking for.
