Goldman Sachs BDC, Inc (GSBD) is a Specialty Finance Company focussed on lending to Middle-Market Companies in the US. It was established in 2012 by Goldman Sachs Group, Inc. and its operations are managed by Goldman Sachs Asset Management, L.P. It is registered on the New York Stock Exchange. It is regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. Because of its focus on Middle Market Companies, its fortunes are closely linked to the prospects of Middle-Market Companies in the US. Other factors that determine its performance are the quality of its portfolio and interest rates in the economy. Being a BDC, GSBD is required to invest at least 70 per cent of its assets in unlisted US companies with a market capitalization of less than 250 million USD. It is also required to distribute at least 90 per cent of its annual profits as dividends to avoid being taxed at the corporate level. GSBD is backed by the strong name, guidance and support of the Goldman Sachs Group.
The Annual Revenue of the company has grown from $ 120.499 million in 2018 to $ 287.992 million in 2021 at a Compounded Annual Growth Rate (CAGR) of 33.7 per cent. The Operating Income has increased from $ 82.836 million to $ 237.375 million during the same period at a CAGR of 42.04 per cent. The Net income after taxes, during the same period, has increased from $ 53.678 million to $ 192.427 million at a CAGR of 53.05 per cent. From 2018 to 2021, the US Economy has grown from 20.5 Trillion USD to 24.8 Trillion USD at a CAGR of 6.55 per cent. This comparison shows how fast the company is growing as compared to the rest of the American Economy. However, the realised and unrealised losses from operations accounted for 13 per cent of the total investment income in 2021, which is high. The net profit margin of 67 per cent is excellent but the Return on Equity is modest at 12 per cent. Being a Business Development Company it does not retain any of its profits and has declared a total dividend of $ 1.95 per share in 2021 accounting for a hundred per cent of the profits generated by the company in 2021. It has given similar dividends in the last five years. The Price to Earnings Ratio of Goldman Sachs BDC, as of March 14, 2022, is 8.94 which is an attractive valuation. The company lays little emphasis on Capital Appreciation. The company is not overly leveraged. It has maintained a Debt Equity Ratio of around 1 for the last few years.
Market and Industry Performance.
The prospects of Goldman Sachs BDC will depend on four factors:
- The growth of the US Economy, which would facilitate or impair the demand for funds.
- The quality of its portfolio. If the portfolio consists of a significant percentage of Non Performing Assets, it will dent the prospects of the company.
- The ability of the company to pass on interest rate hikes in the economy to its clients.
- The prevailing interest rates in the economy.
Since the company is managed by Goldman Sachs Asset Management, there is very little possibility of errors with investment decisions. Currently, the company’s portfolio is diversified across over a hundred and twenty companies in 37 industries and comprises mainly floating rate secured debt (99 per cent of the portfolio). This means that the company is in a position to pass on interest rate hikes to its clients. However, inflation is at record high levels (7℅) and the company may face challenges in the near future because of interest rate hikes likely to be announced by the Federal Reserve in 2022 and 2023. Unemployment also stands at a low of 3.9 per cent at the beginning of 2022, so the Fed won’t reconsider increasing interest rates. About 1 per cent of the invested assets are estimated at a worth, less than, the cost of investment, which is ok.
The current geopolitical situation in Europe because of Russia’s invasion of Ukraine is taking global inflation to record high levels. Also, it has aggravated the global supply chain bottlenecks caused by the pandemic. The American economy is expected to grow at less than 4 per cent in 2022 and less than 3 per cent in 2023 but these forecasts may be revised (downwards), in light of the current high inflation levels. We are at the beginning of a high-interest rate cycle which may hamper the demand for capital in the near term. Although, even modest growth of one or two per cent in the economy will enable the company to perform satisfactorily.
The company is accustomed to distributing all of its profits which is good for investors who seek dividend income. The current dividend yield of the company is 9.41 per cent, which is very good and much higher than the yields of US Treasury Bills and Government Bonds. The dividend yield has been stable around the same level in the last five years. It is comparable with yields of Real Estate Investment Trusts. The stock is not recommended for investors who seek capital appreciation but is a must-have for investors seeking dividend income.