Gladstone Investment: Gain An 8% Yield With This Sturdy BDC

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Private equity remains largely out of reach for most retail investors, despite recent efforts by Congress to broaden the availability of this asset class to the general public. That’s why it’s worth focusing on “private equity-like” stocks that give retail investors that exposure without the hefty upfront capital commitments.

This brings me to Gladstone Investment (NASDAQ:GAIN), which presents such an option. This article highlights what makes GAIN a potentially good choice for income in this space, so let’s get started.


Gladstone Investment is one of two BDCs externally managed by Gladstone Management Corporation, and is led by its longtime CEO, David Gladstone. Unlike its peer, Gladstone Capital (GLAD), GAIN operates more like a hybrid BDC / Private Equity fund, due to its comparatively higher exposure to equity investments.

GAIN has a solid investment track record. Since inception in 2005, GAIN has invested in 55 portfolio companies for $1.5 billion, exiting 27 of these companies over the years and generating $263 million in net realized capital gains and over $46 million in other income on exit. At present, its portfolio is diversified across 26 companies spread across 19 states and 14 industries.

The company is focused on the underserved lower middle market, as defined by those companies with annual EBITDA in the $3 to $20 million range. These companies are less mature than the middle market, giving them more capital appreciation potential.

GAIN is positioned to take advantage of this upside through its equity exposure, as it invests up to $70 million in each portfolio company, typically with a 25% equity and 75% debt mix. As shown below, GAIN’s current portfolio composition at fair value is comprised of 31% preferred & common equity, with the remainder comprised of the safer secured first lien debt (59% of portfolio) and secured second lien (10%).

GAIN Portfolio Mix (Investor Presentation)

Moreover, GAIN’s unique portfolio structure has enabled it to achieve industry-leading total returns of 39%, 73%, and 169% over the trailing 1, 3, and 5 years, far surpassing the 8%, 4%, and -12% industry peer average over the same timeframes. All the while, GAIN is doing it with low leverage, with a debt to total assets ratio of 40%. Moreover, it maintains strong liquidation coverage, with an asset coverage ratio of 252.9% (fair value of assets divided by liabilities).

Meanwhile, GAIN continues its strong track record, with NAV per share growing by $0.16 on a sequential quarter-on-quarter basis to $13.43 as of its fiscal fourth quarter (ended March 31st). It also generated a healthy NII/share of $0.26, which amply covers its dividend (paid monthly) with an 86.5% payout ratio. Including its supplemental distributions of $0.30 during fiscal year 2022, GAIN currently yields an attractive 7.9% based on the current share price of $15.19.

Risks to GAIN include its external management structure, which could result in conflicts of interest. In addition, GAIN currently has an investment on non-accrual, and management provided a meaningful update on this company getting back on track as noted during the recent conference call:

Q: My last question is related to Hobbs, which as we know, is on non-accrual. I see that you restructured its debt. Can you just remind us what issues Hobbs is confronting and what’s its outlook in this kind of environment we are in?

A: Yes. I would say that one of the biggest things that they are confronting is, what I will call, delay in some jobs because the good news for them is that they have a very significant backlog. We are seeing that improving. And where it’s been the last couple of months certainly is they have the backlog, but if you will, there has been a push forward.

So, in other words, the business that they are in, in the HVAC contracting business, and in the region that they are in, there have been somewhat of a pushback from the developer, the general contractor, in part driven not because of the business is going away, but because they in turn have had issues with supply chain. We certainly feel like this year, we are seeing improvement where they had not been over the last six months or nine months. So, that’s kind of, again, a very general comment on Hobbs, but we feel good about where they are.

Meanwhile, I see value in GAIN considering the durability of the enterprise and its portfolio. I also see GAIN as deserving of a premium, with a price-to-book ratio of 1.13x. Sell-side analysts have an average price target of $16, which translates to a potential one-year 11% total return, including regular dividends alone.

Investor Takeaway

GAIN is a unique business development company that has generated industry-leading total returns while maintaining low leverage and strong asset coverage. It continues to perform well, with NAV per share growing on a sequential basis and NII/share amply covering its dividend. GAIN looks attractive at current levels for potentially strong long-term returns.