There have been quite a few hot IPOs this year. Alibaba (NYSE: BABA) and GoPro (Nasdaq: GPRO) to name just a couple. Both of which are up from the price where they came public, handing new shareholders big gains.
But the real money was made before these companies even went public.
Imagine if you’d had the opportunity to invest in either company when it was still private.
[ad#Google Adsense 336×280-IA]How did Bill Gates become the richest person in the world?
By refusing to give up his huge stake in Microsoft (Nasdaq: MSFT) over the years.
A stake he acquired when he founded the company.
But you don’t need to be a genius programmer to make money in private companies.
Peter Thiel famously invested $500,000 in Facebook (Nasdaq: FB) in 2004 for 10.2% of the company.
Today, that would be worth over $21 billion.
Of course, not all investments in private companies end with the investor sitting on stacks of cash. Lots of companies never make it.
Back during the dot-com days, one of my favorites as a consumer was a company called Kozmo. It delivered movies and snacks to your home. So you could rent Gladiator and have them deliver a pint of Ben & Jerry’s along with it, without the hassle of having to go down to Blockbuster and the grocery store.
I used it all the time. But it was a horrible business. It had massive warehouses that cost lots of money, and the company eventually went under. Investors lost big.
Speculating on Private Companies
There is a way to invest in up-and-coming private companies without taking on massive amounts of risk. Business development companies (BDCs) are investment companies that invest in or lend money to (sometimes both) private companies.
Many times BDCs pay excellent dividend yields, either because of the steady cash flow from the loan payments or because the funds are so large that they are constantly exiting equity positions.
An example is Triangle Capital (NYSE: TCAP). It yields over 10% based on the dividend over the trailing 12 months. Its dividend tends to jump around a bit because much of the company’s income is made from sales of equity positions.
Another BDC, Main Street Capital Corp. (Nasdaq: MAIN), has a steadier 6.5% yield, with the dividend paid monthly. Main Street mostly lends money to companies.
So an investor has an opportunity for bigger profits with Triangle, but more reliable income from Main Street.
There are roughly 40 publicly traded BDCs in the United States, most of which offer attractive yields.
Keep in mind, they are not risk free. If a company’s investment doesn’t work out or a loan defaults, that could impact the BDC’s profit or dividend payment.
But it’s a great way to get exposure to small and mid-sized private companies that could become the next Facebook or GoPro. The BDC’s diversified portfolio spreads out the risk. And the shareholder gets a strong income stream as well.
You might not be the next Peter Thiel, but you can still make good money from private companies with BDCs.
Good investing,
Marc
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Source: Investment U