BDC Update: Goldman Sachs BDC
5 min read

BDC Update: Goldman Sachs BDC

Here's an update on Goldman Sachs BDC which was a Best Idea back in November 2021.
BDC Update: Goldman Sachs BDC

February 24, 2023


We're glad to report that yet another has come and gone at Goldman Sachs BDC (GSBD) without any need to change the initial dividend and valuation projection we made in November 2021, which seems like an eon ago.  In those days, when a 15% per annum Total Return was hard to find, we plumped for GSBD as a "BDC Best Idea", assuming a $1.8000 per annum payout every year for half a decade and a terminal multiple of 12.5x, which resulted in a Target Price of $20.50.

Then Vs Now

Now, the BDC has just announced its IVQ 2022 results and held its earnings conference call. Since we last wrote - based on the IIIQ 2021 results - the BDC has increased its portfolio size by  13% and its debt to equity from 0.9x to 1.3x and seen its NAV Per Share drop from $15.92 to $14.61. However, adjusted Net Investment Income Per Share has increased from $0.48 to $0.65 - a 35% jump. You can guess why that happened.


Unchanged over these two periods is the "regular" quarterly distribution of $0.45. GSBD has paid out that same dividend for 32 quarters in a row, or 8 years. That includes the IQ 2023, which remains at $0.45 despite those red-hot earnings. On this latest conference call management did not address how they might handle their overflow earnings going forward, and nobody asked. We're guessing there's a decent chance GSBD might pay out a "supplemental" dividend at some point in 2023, but we're not making any change yet to our projections, which continue to expect a $1.8000 annual payout for another 5 years.  


At today's intra-day price of $15.89, the Expected Return Model projects a total return in half a decade of 98%, or 19.6% per annum. That's better than when we wrote last because GSBD's stock price has fallen (16%) as the environment has changed. The Target Price remains $22.50 and the current yield is 11.3%. These are good returns, but slightly below the current averages. 

No Regrets

We're not bothered that GSBD's price has fallen since calling the stock a Best Idea. The sector itself has dropped (12%) over that same period. Anyway, for those of you counting at home, the "total return" - once you figure in 5 dividends received and one on the way - is almost at break-even. We're only through one-quarter of the investment period BDC Best Ideas works within. What is reassuring is that the dividend has not altered - as we projected - and seems in no imminent danger.


However, the world has changed and there are now more than 20 BDCS offering better long-term returns. That's the beauty of the Best Ideas "system": the constantly changing landscape of BDC investment opportunities.

Published 11/5/2021 as a BDC Best Idea Pick


Let's be honest, Goldman Sachs BDC (GSBD) is not a market favorite going by its stock price. On a 2021 YTD basis, the BDC is the second worst performer at the time of writing: down (1.5%). Over a 12-month period, which has included a huge BDC rally, the stock is the second to last worst performer as well. To be fair, GSBD is trading at an 18% premium to book, but at "only" a 10.4x multiple of its recurring distribution, while many of its peers go for 11x, 12x, or even 15x. Yet GSBD has never reduced its dividend since going public in 2015; paid a generous "special" dividend in 2021 after merging with its non-traded sister BDC and has one of the lowest management fee structures in the industry.

Once Upon A Time

This investor indifference is all the more ironic because GSBD was a very "hot" stock when first coming to market, reaching a high of $25.6 in 2017. This might have been - with the benefit of hindsight - a matter of supply and demand as not all the shares were tradable. Today GSBD - many years wiser and with roughly the same earnings and dividend - opened at $18.88 - (26%) lower. The current annual distribution is $1.80, representing a yield of 9.5%, high by BDC standards.


Some investors are worried that the BDC - which just posted adjusted Net Investment Income Per Share of $0.48 in the IIIQ 2021 - won't have the earnings power to "cover" its distribution in the future when the investment advisor's fee subsidy - set up at the time of the merger with its sister fund - expires at year-end. We're not so worried as the latest subsidy amounted to only 1.4 cents a share, not much of a crutch. Furthermore, GBSBD is only leveraged at 0.9x and could add nearly five hundred million of new investment assets before reaching its self-imposed target leverage. What's more, the BDC has nearly $1.3bn of liquidity and ready access to the unsecured debt market if the need arises for more capital.


GSBD's credit outlook is improving - despite adding a new - small - non-accrual to the books in the most recent quarter. Just 5.5% of the portfolio is underperforming and most are well-known, deeply written down trouble spots like Bollttech Mannings, Kawa Solar Holdings, that spectacular misstep called Animal Supply Holdings, and Country Fresh Holdings.  At the height of the pandemic, GSBD's underperformers reached 16.8% and have been declining reassuringly ever since.

Stood Firm

Unlike many of its peers, GSBD neither reduced its dividend in 2020 in the face of lower income from LIBOR loans or undertook a Rights Offering or took on expensive debt, or changed its well-established middle market strategy. A boatload of new shareholders have been added from the sister BDC without impacting the quarterly payout, and as mentioned management has taken "shareholder friendly" steps like dropping the management fee hugely and setting up an automatic stock repurchase program.


We look out for 5 years and project the dividend will remain at $1.80 a year. (There may be an occasional special along the way, but that's not included in our numbers). Starting at the current opening price of $18.88 on November 5, 2021, the terminal price to the dividend multiple we are using is 12.5x. That's higher than the 11.5x multiple reached in the last 12 months, but substantially below what GSBD traded for in 2015-2017 and below the level used for many of its peers. 71% of the return will come from dividends received and 29% from price appreciation. The price target is $22.50, still (12%) below the BDC's all-time high but 9% higher than the 52-week highest price. Over five years, we project a 67% return or a 13.4% annual return. That's one of the highest returns available right now.


Any reasonable downside seems limited. When we assumed a dividend of $1.60 over 5 years and a terminal multiple of only 10x, the target price dropped to $16.00. On a total return basis, though, GSBD would still generate a positive gain of 27% or 5.4% per annum. Nothing to write home about, but not a disaster.

In Conclusion...

So, GSBD is our newest Best Idea.

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