Torsten Asmus The transition from ultra low interest rate environment to a more restrictive setting has changed the ball game across the overall investment landscape. Asset classes and investment strategies, which were unattractive during the accommodative interest rate period, have suddenly become enticing enough to provide optionality and more choices especially for yield-seeking investors. These asset classes are the ones which embody a meaningful duration factor and emphasize stable cash generation as opposed to a back-end loaded growth profile.
In other words, as the interest rates have gone up, the fixed income and bond-like assets have come back fashionable as the more aggressive discount factor leads to lower valuations (asset prices), which, in turn, push the yields higher. Yet, there are also specific asset classes that have not only benefited (from the dividend investor perspective) on the yield front, but also have been enjoying decent tailwinds that enhance the growth profile. One such asset class is private credit or BDCs .
The way BDCs (which are effectively publicly traded private credit investment vehicles) create value is through spread capture. They assume cheap leverage and utilize these proceeds to fund private credit opportunities at higher yields, thereby profiting from the spread. A large part of the collected spreads are distributed to shareholders (or rather unit holders) with the remaining chunk left at the BDC level to fund new investments.
Now, on.