Wednesday, April 05, 2006

Investing with David Gladstone

Gladstone Management, an investment advisor run by David Gladstone operates two Business Development Companies and a REIT. These companies allow individual investors the chance to participate in the lucrative world of private equity finance.

An article in the Washington post "Gladstone Stays in the Middle Of Commercial Finance" describeses Mr Gladstone's long experience with Business Development Companies, a type of flow through entity that pays out its pre-tax income as dividends similar to a real estate investment trust.

Private equity financing is refers to venture capital investment in companies as well as helping to finance buy-outs and recapitalizations. Mezzanine debt is debt that stands between the balcony (senior debt) and the orchestra (equity holders). Mezzanine debt usually consists of secondary blanket mortgages, unsecured subordinated debt, or preferred stock. Often mezzanine loans include a "sweetener" for the lender in the form of warrants to buy stock or conversion privileges. These sweeteners can provide a lot of upside if the obligor company uses the capital effectively. In Mr Gladstone's own words "We try not to do crazy things and go for home runs, just doubles and singles."

The key benefit of investing in Business Development Companies is that their investments in private equity and mezzanine debt have a low correlation with publicly traded equity and are somewhat less affected by interest rates. As Business Development Companies's they must distribute their pretax income to shareholders like a REIT. This results in very high yields of taxable dividends. All of Gladstone's companies pay monthly dividends.

  1. Gladstone Capital (NASDAQ: GLAD) supplies debt financing to small and mid-sized businesses. Compared to Gladstone Investment, Gladstone Capital makes senior loans which are more secure than direct equity investments and junior loans. This is the oldest of Gladstone's BDCs, The company is currently paying a $0.135 monthly dividend ($1.62 a year).
  2. Gladstone Commercial (NASDAQ: GOOD) is a REIT that supplies real estate financing for industrial and commercial real estate to small and mid-sized companies. GOOD specializes in sale-and-lease back transactions where they purchase property and lease it back to the original owners.An article "Gladstone Commercial Takes On Hard-To-Finance Tenants" in NAREIT's magazine gives some persepective into the thinking behind GOOD. The company is currently paying a $0.12 monthly dividend ($1.44 a year).
  3. Gladstone Investment (NASDAQ: GAIN) (IPO June 28, 2005) seeks to make equity-type investments in small and mid-sized private businesses. Compared to Gladstone Capital, the Gladstone investment makes riskier loans and may take direct equity positions via preferred stock into its portfolio companies. Eventually the company will ownership interests in a portfolio of operating companies At the current time most of GAIN's capital is in cash, as it still filling out its portfolio of investments. The company is currently paying a $0.07 monthly dividend ($0.84 a year).

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