June 20, 2019
Grant M. McGregor, Portfolio Manager McKinley Capital Management, LLC
Robert A. Gillam, CFA Chief Executive Officer McKinley Capital Management, LLC
For nearly three decades McKinley Capital Management, LLC (“McKinley Capital”) has sought to improve risk-adjusted returns for its clients and to be a leader in innovation in the asset management space. With this mindset, and in partnership with a large RIA, McKinley Capital developed a way to offer its income-oriented client’s access to private debt through Business Development Companies (“BDC’s”). These unique instruments are investment companies who focus on small and middle market enterprises through debt and equity investments. Given stricter banking regulations and regulatory requirements bank lenders have avoided the small to middle market loan segments BDC’s serve. This market segment represents approximately 200,000 businesses that employ over 47 million people and represents more than $87 billion in investment capital. Because of this lack of funding, BDC’s have the ability to lend at a considerably higher rate, often times between LIBOR plus 300bps and LIBOR plus 1000bps. These higher lending rates can lead to higher net interest income that lands in investors pockets as most BDC’s are registered investment companies, making them pass-through entities. As pass-through entities BDC’s are required to payout at least 90% of their taxable income to investors which equates out to an average yield of over 9% for most BDC’s. Exhibit 1 below shows the McKinley Capital BDC Representative Portfolio dividend yield compared to several other high yielding spaces such as Master Limited Partnerships (MLP’s), Corporate Bond’s, Real Estate Investment Trusts (REIT’s), and Utilities.
Exhibit 1: McKinley Capital Business Development Company Representative Portfolio – 12 Month Yield Analysis
|Portfolio/Index||12 Month Yield|
|McKinley Capital BDC Representative Portfolio (Median)||9.61%|
|Alerian MLP Index||7.76%|
|High Yield Corporate Bond ETF||5.27%|
|Dow Jones REIT Index||3.84%|
|Dow Jones Utility Index||3.14%|
|S&P 500 Index||1.94%|
Source: McKinley Capital Management, LLC; Bloomberg retrieved on 06/20/2019. Past performance is not indicative of future results.
BDC’s have not only provided investors with industry leading yields but they have also delivered performance as well. The Wells Fargo BDC Index, which consists of the most liquid BDC’s in the space, has outperformed the S&P 500 Index by 168bps annualized over the past ten years. Exhibit 2 below demonstrates this outperformance.
McKinley Capital has grown increasingly optimistic on the BDC space given the legislation changes that have occurred in the last 12 months and industry changes that are on the horizon. In 2018, the Small Business Credit Availability Act (SBCAA) was passed allowing BDC’s to increase their leverage from a 1:1 ratio to a 2:1 ratio. This gives BDC’s the ability to double the amount of investment currently on their books following board and shareholder approval. Keefe, Bruyette and Woods estimate it could increase investment capital by $8-25 billion. Though the SBCAA became effective in 2018, it will take time to implement as BDC’s have to decide how much additional leverage to take, how to secure funding, and how to invest the capital.
Index inclusion has also become a foremost topic for BDC’s and could unlock an incredible amount of investment. In 2014 BDC’s were removed from the Russell and S&P indices due to the Acquired Fund Fees and Expenses rule (AFFE). This led to considerably less institutional and retail ownership due to their exclusion. Several of the leading BDC’s have now developed an entity known as the Coalition for Business Development with the mission to petition the SEC to exclude BDC’s from the AFFE rule, and if successful, will allow them back into Russell and S&P indices. If the coalition is successful we could see flows back in to the space similar to the outflows we saw at the end of June 2014, which was north of $2.8 billion and approximately 23 times the average daily trading volume in the Wells Fargo BDC Index for the day of the reconstitution alone. With possible index inclusion and the increased leverage potential from the SBCAA, BDC’s are set up for more investment potential than they have seen in over a decade.
McKinley Capital is excited about the prospects for our BDC product. We believe investors can benefit from exposure to an asset class that offers a unique diversification opportunity within an investors existing allocation mix. The portfolio is designed to capture appreciation while providing investors an attractive yield via exposure to BDC’s that satisfy McKinley Capital’s rigorous screening criteria. Please feel free to direct any inquiries to IR@mckinleycapital.com.
Exhibit 3: McKinley Capital Business Development Company Representative Portfolio – Holdings Characteristics
|Number of Holdings||22|
|Avg. Wtd Capitalization (in MM’s)||2,136|
|FY1 P/E Ratio||9.58|
|Price to Book||0.96|
Source: FactSet, 04/26/2019
All characteristics median except market capitalization
Exhibit 4: McKinley Capital Business Development Company Representative Portfolio – Top 5 Holdings
|Security Name||% Weight|
|Ares Capital Corp||11.99|
|FS KKR Capital Corp||10.88|
|Prospect Capital Corp||7.08|
|Main Street Capital Corp||5.68|
|TPG Specialty Lending Inc.||5.42|
Source: Advent APX, 04/26/2019. The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. It should not be assumed that recommendations on this list have been profitable or may be profitable in the future. All securities may lose value. Positions may change without notice, are part of a larger program and should not be considered for individual investment. A complete list of all securities held for the most recent 12-month period is available upon request.
Coalition for Business Development. Retrieved April 5, 2019, from Coalition for Business Development: https://coalitionforbusinessdevelopment.com/.
Dodd, Robert and Leslie Vandegrift. “Unveiling Business Development Companies.” Raymond James & Associates 2019.
Lynch, Ryan, and Paul Johnson. “2019 Outlook: 2018 Was Highlighted by Regulatory Change; 2019 Could Be an Encore.” Keefe, Bruyette & Woods 2018.
Lynch, Ryan, and Paul Johnson. “Deep Dive into the BDC Leverage Bill.” Keefe, Bruyette & Woods 2018.
McKinley Capital Management, LLC (“McKinley Capital”) is a registered investment adviser under the U.S. Investment Advisers Act of 1940. McKinley Capital is registered with the following Canadian provinces: the British Columbia Securities Commission; the Ontario Securities Commission; the Alberta Securities Commission; and the Quebec Financial Markets Authority. McKinley Capital is not registered with, approved by, regulated by, or associated with the Financial Conduct Authority (“FCA”), the Prudential Regulation Authority (“PRA”), the Securities & Futures Commission of Hong Kong or the China Securities Regulatory Commission. Additionally, none of the authorities or commission listed in the previous sentence has commented on the firm, the content of any marketing material or any individual suitability assessments.
The material provided herein has been prepared for an institutional client presentation, may contain confidential and/or proprietary information, and should not be further disseminated without written approval from McKinley Capital’s Compliance Department. Returns are absolute, were generated using McKinley Capital’s proprietary growth investment methodology as described in McKinley Capital’s Form ADV Part 2A, are unaudited, and may not replicate actual returns for any client. McKinley Capital’s investment methodology has not materially changed since its inception, but it has undergone various enhancements. No securities mentioned herein may be considered as an offer to purchase or sell a firm product or security. Any comment regarding any individual security may only be used for reference and may not be reflective of composite or individual portfolio ownership. McKinley Capital may not currently hold a specific security and any positive comments regarding it may no longer be applicable and should not be relied upon for investment purposes. No security is profitable all of the time. With any investment, there is the potential for total loss. Investments are subject to immediate change without notice. Comments and general market related perspectives are for informational purposes only; were based on data available at the time of writing; are subject to change without notice; and may not be relied upon for individual investing purposes. Past performance is no guarantee of future results.
Trade date based performance shown reflects the reinvestment of realized gains, dividends, interest and other earnings calculated using McKinley Capital’s growth investment methodology. Portfolio performance is shown gross and/or net of management fees or asset based broker fees as indicated in the text of the presentation. Clients should realize that net returns would be lower and must be considered when determining absolute returns. Detailed account inclusion/ exclusion policies are available upon request. Returns are based on fully discretionary accounts and do not take individual investor tax categories into consideration. Returns reported for the periods prior to January 1, 2001 were initially calculated using McKinley Capital’s quarterly reporting methodology. Monthly returns for the period were retroactively calculated and are considered supplemental information. Returns from January 1, 2001, to current date utilize a monthly reporting methodology. No guarantee can be made that the composite performance reflects a statistically accurate representation of the performance of any specific account. Charts, graphs and other visual presentations and text information are derived from internal, proprietary, and/or service vendor technology sources and/or may have been extracted from other firm databases. As a result, the tabulation of certain reports may not precisely match other published data. Specific results from calculations and formulas may be rounded up. Future investments may be made under different economic conditions, in different securities and using different investment strategies.
For GIPS® compliant presentations, all information is supplemental to the GIPS® compliant composites and a copy of the applicable GIPS® composite(s) is included with the presentation. Composite returns and individual client returns may materially differ from the stated benchmark(s). Deviations may include, but are not limited to, factors such as the purchase of higher risk securities, over/underweighting specific sectors and countries, limitations in market capitalization, company revenue sources, McKinley Capital’s investment process and/or client restrictions. Global market investing, (including developed, emerging and frontier markets), also carries additional risks and/or costs including but not limited to: political, economic, financial market, currency exchange, liquidity, accounting, and trading capability risks. Derivatives trading and short selling may materially increase investment risk and potential returns. These risks may include, but are not limited to, margin/mark-to-market cash calls, currency exchange, liquidity, unlimited asset exposure, and counter-party risk. Foreign accounting principles may also differ from standard U.S. GAAP standards.
Composite returns include only those accounts holding common stocks, preferred stocks, ADRs, ordinary shares, money market instruments and/or cash equivalents – and for non-U.S. and global composites foreign currencies and stocks. For the period prior to April 1, 2001, composites contain both wrap and non-wrap accounts. For this period, net returns for non-wrap accounts were not reduced by wrap sponsor fees, and gross returns for non-wrap accounts were reduced by transactional costs.
Data may have originated from various sources including, but not limited to, FactSet, Bloomberg, TQA, ITG™, APT, Zephyr and/or other similar systems and programs. “FTSE®”, “Russell®”, “MTS®”, “FTSE TMX®” and “FTSE Russell” and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies. All rights in the FTSE Russell® Indices vest in FTSE Russell® and/or its licensors. Neither FTSE Russell® nor its licensors accept any liability for any errors or omissions in the Indices or underlying data. No further distribution or dissemination of the FTSE Russell® data is permitted without express written consent. With regards to any materials, if any, accredited to MSCI: Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. With reference to “ITG™”: the information provided has been taken from trade and statistical services and other sources deemed reliable. Accuracy or completeness is not guaranteed and should not be relied upon as such. No guarantee or warranty is made as to the reasonableness of the assumptions or the accuracy of the models or market data used by ITG or the actual results that may be achieved. These materials are for informational purposes only and are not intended to be used for trading or investment purposes or as an offer to sell or the solicitation of an offer to buy any security or financial product. These materials do not provide any form of advice (investment, tax or legal). Please refer to the specific service provider’s web site for complete details on all indices. McKinley Capital makes no representation or endorsement concerning the accuracy or propriety of information received from any third party. Clients should rely on their custodial statements for the official investment activity records.
Fees are billed monthly or quarterly, which produces a compounding effect on the total rate of return net of management fees. As an example, the quarterly effect of investment management fees on the total value of a client’s portfolio assuming (a) $1,000,000 investment, (b) portfolio return of 5% a year, and (c) 1.00% annual investment advisory fee would be $10,038 in the first year, and cumulative effects of $51,210 over five years, and $110,503 over ten years. Actual client fees vary. A fee schedule, available upon request, is described in the firm’s Form ADV Part 2A. To receive a copy of the firm’s ADV , a complete list and description of McKinley Capital’s composites and/or a presentation that adheres to the GIPS® standards, please contact McKinley Capital at 1.907.563.4488 or visit the firm’s website, www.mckinleycapital.com. All information is believed to be correct, but accuracy cannot be guaranteed.