Issue #23

Top BDC Picks for Income & Stability

The private credit market continues to gain traction as investors hunt for yield and stability amid lingering rate uncertainty. Two Business Development Companies (BDCs) — each focused on a different segment of the U.S. lending landscape — are standing out for their performance, portfolio quality, and dividend strength.

Blue Owl Technology Finance Corp. (NYSE: OTF) leverages its scale and expertise in lending to upper middle-market technology firms, generating strong income from floating-rate loans and trading below book value despite robust earnings.

Fidus Investment Corporation (NASDAQ: FDUS), meanwhile, dominates the lower middle market with its mix of high-yield debt and equity co-investments, consistently outperforming peers with double-digit dividend yields and strong NAV growth.

Both represent compelling income plays for investors seeking steady cash flow, backed by prudent management and diversified portfolios built for the current interest rate environment.

Blue Owl Technology (NYSE:OTF)

Blue Owl Technology Finance Corp. (NYSE:OTF) is a Business Development Company (BDC) that focuses on originating and investing in the debt and equity of U.S. upper middle-market technology-related companies, with a particular emphasis on enterprise software. As a BDC, OTF's primary objective is to maximize total return for shareholders by generating current income from its debt investments and capital appreciation from its equity-linked investments.

Business Model and Revenue Streams

OTF operates as a specialty finance company that provides private credit solutions to growing technology businesses. The company's strategy is centered on direct lending to high-quality, sponsor-backed software companies, which are often considered to be recession-resilient due to their mission-critical services and highly recurring revenue streams.

Revenue streams primarily consist of two components:

• Interest Income from Debt Investments: This is the core revenue stream. OTF primarily invests in senior secured or unsecured loans and, to a lesser extent, subordinated or mezzanine loans. Crucially, about 97% of its debt investments are floating rate, meaning the interest rate—and therefore OTF's income—increases with rising benchmark interest rates.
• Capital Appreciation/Other Income from Equity Investments: OTF also makes equity and equity-linked investments (like warrants) in its portfolio companies, which provide the potential for capital gains when these companies are sold or have a liquidity event.

OTF leverages the broad platform of its external manager, Blue Owl Capital, for extensive deal flow and underwriting expertise, allowing for a highly selective investment process. Its portfolio companies are typically market leaders with weighted average revenue of million and a low weighted-average loan-to-value (LTV) of 32%.

Macroeconomic Impact Analysis 🌍

BDCs like OTF are highly sensitive to interest rate policy and the overall health of the credit market:

• Positive Impact from High-Interest Rates: Because the vast majority of its portfolio consists of floating-rate loans, OTF benefits directly from elevated interest rate environments (like the one following the Federal Reserve's rate-hiking cycle in 2023-2024). Higher base rates translate into higher interest income, which supports strong Net Investment Income (NII) and dividend coverage.
• Risk from Economic Downturn/Credit Quality: A major risk is an economic slowdown, which could impair its portfolio companies' ability to service their debt, leading to an increase in loan non-accruals and potential losses. However, OTF mitigates this by focusing on non-cyclical, recession-resistant software businesses with high revenue retention and low LTVs.
• Impact of Rate Cuts: While high rates boost income, significant and rapid interest rate cuts by the Federal Reserve (as expected in a "soft landing" or recession scenario) would reduce OTF's interest income, potentially leading to a reduction in supplemental dividends, though most BDCs are expected to cover their regular dividends even with substantial rate declines. A less-aggressive rate-cut scenario or a "soft landing" is generally seen as positive for BDCs, as it preserves earnings strength while stabilizing the economy.

Recent Performance and Corporate Developments 📈

OTF has demonstrated robust performance, driven by its focused strategy on upper middle-market software direct lending and a significant corporate action.

Q2 2025 Financial Highlights: 💰

The company reported strong results for the second quarter of 2025 (period ending June 30, 2025):

• Revenue: million.
• Earnings per Share (EPS): , significantly beating the forecasted .
• Adjusted Net Investment Income (NII): per share, comfortably covering the regular dividend.
• Net Asset Value (NAV): NAV per share increased to , demonstrating effective asset management and unrealized gains from select equity investments.
• Portfolio Scale: Total portfolio investments reached billion across 184 portfolio companies.

Strategic Initiatives and Mergers: 🤝

The most significant recent corporate development was the merger with Blue Owl Technology Finance Corp. II (OTF II), which closed in March 2025.

• Creates the Largest Software BDC: The merger established OTF as the largest software-focused BDC by total assets, with over billion in pro forma combined total assets as of December 31, 2024.
• Enhanced Scale: The increased scale is expected to serve as a competitive advantage for sourcing and underwriting large deals and is positioned to drive further Return on Equity (ROE) expansion for the combined entity.

The company has also authorized a $200 million share repurchase program to enhance shareholder value and is targeting its optimal leverage range of to debt-to-equity within three quarters.

Dividend Analysis and Fair Value 🎯

Dividend and Income Profile

As a BDC, OTF's mandate is to distribute the vast majority of its taxable income to shareholders, resulting in a high yield profile.

• Current Dividend: OTF paid a regular quarterly dividend of per share in Q2 2025, which was supported by its Net Investment Income (NII). The company also announced a special dividend, indicating confidence in its earnings power from the high-rate environment.
• Annualized Dividend Yield: The forward dividend yield is approximately , reflecting its position as a high-income vehicle.
• Long-Term Prospective: The combination of a highly scalable technology lending platform, a focus on defensive software companies, and the benefits of a primarily floating-rate portfolio provides a relatively stable and attractive income stream for investors, supported by excellent credit quality (non-accruals are currently of investments).

Fair Price Analysis

• Price to Book Value (P/BV): OTF's Price/Book Value ratio is around . Since the book value (Net Asset Value or NAV) per share is (as of Q2 2025), a P/BV below suggests the stock is currently trading at a discount to its liquidation value. For BDCs, trading at a discount to NAV is generally viewed as an indication that the stock is undervalued relative to the fair value of its underlying assets.
• Analyst Price Target: Wall Street analysts have set a consensus 12-month price target of (as of October 6, 2025). This target is above the stock's current price (around ), suggesting a potential upside for investors.

Analyst Estimates and Ratings

• Consensus Rating: The consensus rating from analysts covering OTF is a "Buy".
• Recent Ratings: Out of the five analysts providing ratings, 40% recommend a "Strong Buy" and 60% recommend a "Hold". This indicates a strong positive bias from the analyst community, with a majority seeing a compelling investment opportunity or expecting it to perform in line with the broader market.

Investor-Focused Takeaway: Is OTF Right for Your Portfolio?

Blue Owl Technology Finance is a premier choice among BDCs for investors seeking high current income with exposure to the resilient technology sector. Its position as the largest publicly traded, technology-focused BDC (following the OTF II merger) provides a competitive advantage in sourcing large, high-quality loans to financially sound software companies.

The stock is currently trading at an attractive discount to its Net Asset Value (P/BV of ) and offers a high dividend yield that is well-supported by earnings, especially in the current high-interest-rate environment. The consensus "Buy" rating and price target suggest a favorable long-term outlook.

What to Watch in the Near Term: 👁️

• Interest Rate Trajectory: Monitor the Federal Reserve's actions. While high rates are beneficial, a sharp decrease could compress NII and lead to a reduction in supplemental dividends.
• Credit Performance: Despite a focus on quality companies, any signs of rising non-accruals would signal stress in the portfolio. OTF's credit quality is currently excellent, with non-accruals under .
• ROE Expansion: The company is aiming to increase its ROE to . Investors should track its progress on this goal as the synergies from the OTF II merger take effect.

Recommendation:

OTF is viewed as a Strong Buy for income-focused investors who want exposure to the defensive characteristics of the private technology credit market. The discount to NAV and strong dividend coverage make it an attractive pick, though investors should be mindful of the impact of potential future interest rate cuts on its earnings stream.

Fidus Investment (NASDAQ:FDUS)

Fidus Investment Corporation (NASDAQ: FDUS) is a seasoned Business Development Company (BDC) that specializes in providing customized debt and equity financing solutions to companies in the U.S. lower middle market—businesses typically having annual revenues between $10 million and $150 million. Since its IPO in 2011, Fidus has cultivated a niche focused on generating both stable current income and capital appreciation from its diversified portfolio.

Business Model and Revenue Streams

Fidus’s model is based on partnering with proven, resilient businesses in the lower middle market—a segment often viewed as fragmented and less competitive than the larger direct lending space. This focus allows the company to secure attractive risk-adjusted returns. The portfolio, totaling approximately $1.2 billion, focuses on event-driven transactions like leveraged buyouts, refinancings, and growth capital.

Revenue comes from three core components:

• Interest Income (The Core): Constituting approximately 85% of total revenue, this stream is derived from its debt investments, which include senior secured loans, subordinated loans, and unitranche loans. A key credit quality control for Fidus is its emphasis on first lien loans (which have repayment priority) and highly selective underwriting.
• Dividend Income and Capital Gains (The Upside): Fidus actively pursues equity co-investments (preferred or common equity and warrants) alongside its debt financing. This "mezzanine debt and equity" approach provides the potential for substantial realized capital gains, which are crucial for generating cumulative returns in excess of cumulative dividends.
• Fee Income: This includes fees from advisory services, loan originations, and prepayment fees.

Macroeconomic Impact Analysis 🌍

The current macroeconomic environment, characterized by elevated interest rates and an uncertain M&A landscape, has several direct impacts on FDUS:

• Positive Impact from High Rates: Similar to other BDCs, Fidus benefits from higher base rates because approximately 71.1% of its debt portfolio is variable-rate (floating rate) as of Q2 2025. This tailwind has resulted in a material increase in interest income and overall portfolio yield, which reached 13.1% in Q2 2025.
• Impact of Funding Costs: The benefit of high-rate income is partially offset by an increase in Fidus’s own financing expenses. However, the company holds SBIC licenses, which allow it access to low-cost, fixed-rate unsecured debt financing backed by the Small Business Administration (SBA), effectively reducing the overall weighted average cost of its debt, which was 4.8% as of Q2 2025.
• M&A Slowdown: A soft mergers and acquisitions (M&A) environment poses a challenge by slowing the pace of new deal origination and the realization of capital gains from existing equity investments. FDUS management acknowledges this but remains active in finding investment opportunities and monetizing equity positions when favorable.

Recent Performance and Corporate Developments 📈

Fidus has maintained a strong operational trajectory, consistently exceeding analyst expectations for its core earnings metric.

Recent Financial Highlights (Q3 2024 and Q2 2025): 💰

Fidus has reported a series of robust quarters, consistently demonstrating solid financial execution and outperforming market estimates.

• Income & Earnings: Total Investment Income has shown consistent strength, rising to $38.4 million in Q3 2024 (a 12.3% YoY increase) and further to $40.0 million in Q2 2025 (a 12.1% YoY increase), driven by high-interest income. The core earnings metric, Adjusted Net Investment Income (NII) per share, comfortably beat consensus in both periods, hitting $0.61 in Q3 2024 (vs. $0.57 consensus) and $0.57 in Q2 2025 (vs. $0.52 consensus), ensuring strong coverage for its dividend payouts.
• Asset Growth & Quality: The Net Asset Value (NAV) per share continued its steady growth trajectory, increasing from $19.42 (as of September 30, 2024) to $19.57 (as of June 30, 2025), signaling sound portfolio valuation. Furthermore, the company maintained excellent credit quality, with loan non-accruals remaining under 1%, highlighting management's disciplined approach despite macroeconomic pressures.

Strategic Initiatives and Mergers: 🤝

• New SBIC License: A key corporate development in Q3 2024 was the approval of a new Small Business Investment Company (SBIC) license from the SBA. This is highly beneficial as it grants FDUS access to low-cost, long-term, fixed-rate debt capital, providing a competitive edge for funding new deals and stabilizing its borrowing costs.
• Equity Monetization: In Q1 2025, Fidus successfully monetized two equity investments, generating a net realized gain of $11.5 million, or $0.33 per share, which significantly contributed to the increase in NAV and provides a source for potential future capital gains distributions.

Dividend Analysis and Fair Value 🎯

Dividend and Income Profile

Fidus is a highly attractive income stock, utilizing a multi-tiered dividend structure to distribute its earnings from both current income and capital gains.

• Base Dividend: Fidus maintains a steady base dividend (e.g., $0.43 per share in Q4 2024) that is amply covered by its consistent Net Investment Income (NII).
• Supplemental Dividends: Due to the strong NII generated by high interest rates, FDUS regularly pays a supplemental dividend (e.g., $0.18 per share in Q4 2024), boosting the total payout.
• Annualized Dividend Yield: Based on recent payouts, the trailing-twelve-month (TTM) dividend yield is approximately 11.15%, making it a top-tier income-generator in the BDC space.

Fair Price Analysis

• Price to Book Value (P/BV): With the stock trading around $20.37 and a NAV per share of $19.57 (as of Q2 2025), Fidus is trading at a slight premium to its Net Asset Value (P/BV of approximately 1.04). Trading above NAV suggests the market places a high value on Fidus's platform, management expertise, high credit quality, and superior long-term track record of generating NII and NAV growth.
• Analyst Price Target: The consensus 1-year price target is $22.00, suggesting a modest upside from its current share price. This indicates analysts believe the company still has room for price appreciation beyond its current market valuation.

Analyst Estimates and Ratings

• Consensus Rating: Institutional ratings are generally positive. The stock has recently received a "Buy" rating from major firms like Ladenburg Thalmann & Co.
• Recent Momentum: The strong outperformance in NII and the subsequent dividend increases have led to positive momentum in analyst sentiment, reinforcing its reputation as a well-managed BDC.

Investor-Focused Takeaway: Is FDUS Right for Your Portfolio?

Fidus Investment Corporation is a high-conviction choice for income investors seeking an attractive yield from a well-managed player in the less-cyclical lower middle-market segment. The company's unique value proposition is its blend of high floating-rate debt income (a macro tailwind) and the upside potential from its equity co-investments (a long-term growth driver).

The stock's current trading price at a slight premium to NAV is justified by its consistent over-coverage of its dividend and the strategic advantage gained from its new SBIC license.

What to Watch in the Near Term: 👁️

• Capital Gains Realization: Continued equity monetizations are key to demonstrating the value of the portfolio and providing capital for future special dividends.
• Investment Pace: Monitor the deployment of capital into new investments, especially given the "soft M&A environment." A robust investment pipeline is essential for continued portfolio and income growth.
• Credit Quality: The primary risk remains credit performance. Non-accruals staying below 1% is a critical measure of the health of the lower middle-market borrowers.

Recommendation:

FDUS is rated as a Strong Buy for income investors. Its superior yield, consistent NII coverage, growing NAV, and prudent management of credit risk, particularly through the use of low-cost SBIC debentures, position it well to navigate the current economic cycle and continue delivering outsized shareholder returns.

A Final Word on Your Investment Decision

Blue Owl Technology Finance Corp. (OTF) and Fidus Investment Corporation (FDUS) represent two ends of the BDC spectrum—but both are built for yield, resilience, and long-term income potential. One dominates the tech-lending upper middle market, while the other thrives in the yield-rich, equity-enhanced lower middle market. Each BDC is uniquely positioned to capitalize on elevated rates, disciplined underwriting, and shareholder-friendly payout structures.

Blue Owl Technology Finance Corp. (OTF) – Floating-Rate Powerhouse in Tech Lending
✔ 97% floating-rate portfolio positioned to thrive in high-rate environments
✔ Merger with OTF II created the largest software-focused BDC
✔ Trading below NAV with strong NII and special dividends
➤ Best for: Income investors looking for high-yield exposure to resilient, recurring-revenue software companies with strong credit quality

Fidus Investment Corporation (FDUS) – Dividend Dynamo With Equity Upside
✔ 11%+ yield through a combination of base + supplemental dividends
✔ Focused on lower middle-market debt and equity co-investments
✔ SBIC license provides low-cost leverage and downside protection
➤ Best for: Long-term income investors seeking premium yield, steady NII coverage, and upside from capital gains and NAV growth

Investor Insight:

📈 Want NAV growth and high-quality loans in the tech sector? → OTF
​ 💰 Want consistent dividends with equity upside potential? → FDUS

Each BDC delivers powerful income—but with different growth drivers and risk profiles. OTF benefits from floating-rate loans to software leaders, while FDUS offers an edge through its hybrid debt/equity model and SBA-backed funding.

We’ll be back with our next report soon, bringing you fresh insights on the market and new opportunities to watch. In the meantime, we’d love to hear from you—let us know how you found this report, what niche sectors you’d like us to cover next, and don’t forget to share your top stock holdings with us. Your feedback helps us deliver reports that matter most to your investing journey.

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Happy Trading
​— Team Premium Stock Alerts