In Hamlet, we’re told “Neither a borrower nor a lender be.”
In essence, William Shakespeare was telling us to avoid borrowing and lending. Borrowing turns you into a spendthrift, while lending puts relationships at risk.
But “The Bard” may have adopted a different viewpoint had he known about the Internet and the financial “Disruptors” that are standing the lending business on its ear – creating one of the greatest “Extreme Growth” profit opportunities I currently see.
In my last report on Extreme Growth investments, I shared an analysis tool that I’ve long used to identify the very best profit plays. I also detailed the revolution we’re seeing in lending. And I promised to zero in on the single-best current profit opportunity.
Today I’m keeping that promise…
The New Rules of the Game
As surprising as it sounds, if you want to make some money, lend some.
Just look how well it works for banks.
You say you don’t have money to lend? Stop buying $4 coffees at Starbucks Corp. (Nasdaq: SBUX) for a week and you will – because the new, Internet-based models allow you to lend in small increments.
Peer-to-peer (P2P) lending is all the rage. You can join a P2P lending platform in minutes and start “funding” someone’s loan request with as little as $25.
But maybe you think The Bard was onto something with his advice and don’t want to lend money to strangers – sweating it out until they hopefully pay you back. You want to break into the loan business with $25, get your money back any day you want it and still make fat returns.
It’s a tall order – and a one-sided one, at that.
But you’re in luck.
For $25 – or less than a third of that, meaning as little as $7.70 – you can play the lending game and earn between 8% and 11% a year… and maybe more.
The easy, safe way to play the new lending game is by buying stock in a Disruptor.
There are publicly traded companies that act like banks – lending at high rates and passing the profits along to shareholders – that you can invest in with a few or a fistful of dollars.
Goldman Sachs Group Inc. (NYSE: GS), the mega-investment bank, and Apollo Global Management LLC (NYSE: APO), the giant private-equity (PE) firm, are two players in the new lending game that you can invest with.
Both Goldman and Apollo have publicly traded “business-development companies” (BDCs) that lend money to high-interest-paying borrowers, while avoiding cumbersome banking regulations. And because BDCs are required by law to pass along at least 90% of their net income to shareholders, investors enjoy fat returns, just like big-shot bankers.
The Goldman BDC – Goldman Sachs BDC Inc. (NYSE: GSBD) – debuted on March 23 after its initial public offering (IPO). Apollo’s entrant – Apollo Management Corp. (Nasdaq: AINV) – ranks as one of the first BDCs: It’s also more seasoned, by virtue of its IPO back in 2004.
“Like a Hedge Fund”
The BDC structure is what gives these lending operations their advantages.
In 1980, Congress passed the Small Business Inventive Investment Act as a kind of “end run” around the Investment Company Act of 1940 – to let public companies pool money to invest in private companies. Because the new rules were tied to the Investment Company Act of 1940, the allowance of BDCs became known as the “1980 Amendments.”
Business-development companies are publicly traded, closed-end companies that are subject to U.S. Securities and Exchange Commission rules and regulations. A majority of the boards of directors must not be “interested persons,” as defined by the 1940 Act.
BDC stockholders enjoy the liquidity that comes with the investment in an exchange-traded company whose business is lending at fairly high interest rates to small- and mid-market private companies. Although BDCs can make unsecured loans, most of the term loans they make are senior-secured loans backed by assets such as property, inventory, equipment and cash flow.
Most of their loans are “adjustable-rate notes,” meaning they provide lenders some protection when interest rates rise.
In addition to lending to companies, BDCs can make direct investments to grow capital. And they generally provide a great deal of managerial assistance.
For tax purposes, business-development companies are treated as registered investment companies (RICs). That allows them to avoid being taxed on “ordinary income” at the corporate level and forces them to “pass through” to shareholders – in the form of dividends – at least 90% of their capital gains.
Another thing I like about BDCs, which not every investor will agree is a good thing, is that managers are incentivized to earn rich profits.
In addition to the management fees charged by third-party managers of the loans and business, BDC managers typically charge an incentive fee. Management fees range from 1.5% to 2%, and incentive fees typically are 20% of the net profits.
These fees are typical of what regular hedge funds charge, which is why a lot of hedge-fund players are known as “2 and 20 managers.” I’m a fan of reasonable incentive fees – not just because I’ve managed my own hedge funds, but also because incentive fees align the interests of management with those of shareholders and stakeholders.
Like hedge funds, BDCs also have “hurdle rates,” and sometimes “high-water marks,” which means they have to return a minimum amount before they make their incentive fee. And if these BDCs take an incentive fee, and then lose money, they have to make up for any losses before paying themselves any incentive fee again.
Now that we understand how these Disruptors work – as well as the “new” lending model and associated companies that financial Disruptors have spawned – it’s time to put all these insights to profitable use.
Players Without Peer
For my money, if I want to get into the lucrative lending game, I’m going to “lend” my money by buying shares of stock in a venture that makes high-interest-rate loans, helps manage the companies they loan to, has the expertise to assess and manage credit and business risks, isn’t over-regulated like most banks, aligns its interests with mine and has to pass through at least 90% of its profits to me.
In lending, it literally doesn’t get any better than that.
That’s why I like publicly traded BDCs, like the newly public Goldman Sachs BDC Inc. (NYSE: GSBD), which trades at $20.30 a share and will yield around 8%. And I like Apollo Management Corp. (Nasdaq: AINV), which trades at $7.75 and yields 10.3%.
If you can lend your money for a fat return and still have daily liquidity to get it all back with the click of a mouse, why not become a new Disruptor lender yourself?
[Editor’s Note: Shah likes to hear from you. Let us know what you think about the financial Disruptors he’s been sharing with you and about this Extreme Growth profit opportunity. Just post a reply in the comment box below.]