Around the office, we call them “secret wealth investments.”
That’s because they’ve been almost exclusively used by the wealthiest investors and institutions for decades now.
Yale has used them to generate average returns of 30% every year for their endowment funds since 1973.
High net-worth individuals have used them to beat S&P 500 investor returns by an average of 7 percentage points every year for the past decade.
[ad#Google Adsense 336×280-IA]And because federal law has stipulated that only millionaires with annual incomes above $200,000 per year can invest in them, about 94% of investors have been blocked out of this private-market investment.
That is, until we found a backdoor way for all investors to invest in them…
If you’ve been reading Dividend Opportunities for the past few weeks, you know some my colleagues and I are big fans of these ultra high-yield investments.
Some of these “secret wealth investments” I’m referring to are known as private equity firms.
And over the last decade, they’ve slowly become open to individual investors. Today, roughly a dozen of these firms sell shares on the public New York Stock Exchange.
Not too long ago, one of my High-Yield Investing subscribers emailed me a question asking me about one of these private equity firms. It happens to be one of my favorites that I’d like to share with you.
KCAP Financial (Nasdaq: KCAP) is a private equity and venture capital firm, one in a growing field of diverse entities known as business development companies (BDCs).
Like other BDCs, KCAP is required by law to pay 90% of its profits to investors in the form of dividends.
That, along with its strategic business model, allows KCAP to pay one of the highest dividend yields in this class of investments…
Like many of its peers, KCAP invests in mid-sized companies, organizations that are beyond the startup stage and generating positive profits (between $7 and $50 million in annual EBITDA), but still need external capital to grow and expand. KCAP is happy to provide that capital in the form of subordinated debt, convertible equity stakes, and everything in between.
The company primarily targets companies with conservative capital structures, consistent cash flows, trustworthy management teams, and defendable market positions.
Last quarter, it had $265 million in debt securities representing 80 issuers. Of all these borrowers, less than 1% were in default.
First lien loans in the firm’s portfolio were carrying yields of 7.1%, while riskier second and mezzanine loans were paying 10.5%.
You don’t even need to do the math to know that this is a firm that has a strong grasp on minimizing risk while maximizing its income from loans at the same time.
From a strategic standpoint, I like that KCAP is internally managed, eliminating expenses that would otherwise be paid to external third-party managers.
Here’s another big plus — KCAP stands to reap huge profits from future Fed moves that will inevitably come.
The firm has placed a huge focus on floating rate loans, which make up 85% of its portfolio. This means that as the Fed pivots toward an era of rising interest rates, the firm will take in more and more in interest from its already high-interest loan investments.
In fact, management estimates that every 100 basis point rise in rates will boost net investment income by $652,000 annually.
Industry diversification is another reason to like this BDC. The company has investments in aerospace, food and beverage, electronics, finance, healthcare, telecom and several other industries. And it’s also raking in recurring fees from its asset management operations.
To top it off, KCAP also has high insider ownership — always a good sign. And it isn’t relying on excessive leverage to generate attractive returns.
The firm’s overall $437 million portfolio (net asset value of $7.67 per share) is generating about $0.24 in quarterly net investment income, enough to throw off a huge dividend yield of 12.7%.
Simply put, “secret wealth investments” like BDCs make solid income investments, and they’re even better if they’re trading at the right price. I think KCAP is worthy of close consideration at prices below $9.
I’m a big believer in closely studying what the wealthy elite have historically invested in. Do that, and you can wind up with serious long-term winners. That’s why I like BDCs. In fact, I own two of them in my High-Yield Investing portfolio, and they’re currently throwing off yields of 11.7% and 12.8%, respectively.
But these BDCs aren’t the only “secret wealth investments” on my radar right now.
As I mentioned earlier, the private investments that were once reserved for America’s wealthiest are beginning to be unlocked for the rest of us. And like KCAP, these private firms are required by law to pay 90% of profits to shareholders and are known to throw off dividend yields ranging from 8% to over 12.5%.
Good investing,
Nathan Slaughter
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Source: Dividend Opportunities