BDC management fees.
From Barrons Investment Ideas column:
<Given the active management of BDC assets, companies in the sector typically pay a base management fee to external asset managers of around 2% of assets, and an incentive fee of 20% of the upside over pre-defined hurdle rates. This is very different than a passively managed ETF which typically has a management fee ofbetween 0.15% and 0.5%… Investors will need to account for the above factors when assessing the attractiveness of BDC equities.>
March 20, 2012, 4:35 P.M. ET BDC Returns Beat Fixed-Income ETFs
By Michael Aneiro Investors who have been piling into bond ETFs this year might be better off looking elsewhere – namely at business development companies.
BDCs are generally private equity investment vehicles that are publicly traded. The largest BDCs include Apollo Investment Corp. ( AINV), Ares Capital Corp. ( ARCC), BlackRock Kelso Capital Corp. ( BKCC), Fifth Street Finance Corp. ( FSC) and Kohlberg Capital Corp. ( KCAP).
Barclays Capital points out that equity valuations for BDCs are a function of dividend yields, which typically trade at a spread over the high-yield bond index or other similar benchmarks, and says that since underlying portfolios of BDCs are pools of fixed income investments, they should be compared to other fixed income benchmarks. Barclays used the two main high-yield ETFs – the SPDR Barclays Capital High Yield Bond ETF ( JNK) and the iShares iBoxx $ High Yield Corporate Bond Fund ( HYG) – to assess the returns on BDCs.
Barclays found that as a sector, BDCs currently offer an incremental 170 basis points in return on capital over comparable fixed income exchange-traded funds, attributing the higher dividend yield to active management of BDC portfolios and their asset mix. Barclays said the return profile of BDCs can be replicated through a levered holding of fixed income ETFs, but the degree of leverage required to do so will be more than the on-balance sheet leverage carried by BDCs.
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