Corporate funding opportunities differ between public and private companies, as the chart below outlines.
Public companies can raise capital by issuing stock, allowing investors to own a portion of the company. Or they can issue bonds, which allow investors to loan money to the firm at a certain interest rate, which the borrower repays over a certain amount of time.
Public company bonds are typically issued with fixed rates and, because they are unsecured, offer investors little or no protection should a company default. Instead of investing in bonds or stocks, BDCs invest in private companies primarily through senior secured loans. These loans are typically issued with variable rates, meaning the interest payments that borrowers owe adjust as prevailing rates change, and may offer investors protection against rising rates. Senior secured loans are also backed by hard assets such as property, inventory, equipment and cash flows establishing them as “first in line” creditors in the event of a company default.
BDCs can also make direct equity investments in privately owned companies with the aim of growing the value of their invested capital.
BDCs are obligated to provide managerial assistance to the companies they invest in, which has the potential to help ensure the performance of their investment over time.
Senior secured loans, second lien loans, mezzanine debt and selected equity investments may be risky, and we could lose all or part of our investment. Most loans in which we invest will not be rated, or would be if they were rated by a rating agency, as "below investment grade" quality. Below investment-grade quality securities are commonly known as "junk" and may be considered more speculative with respect to the issuer's capacity to pay interest and repay principal.
For more information, read the prospectus for HMS Income Fund. Copies of the prospectus may be obtained from Hines Securities, Inc., 2800 Post Oak Blvd., Suite 4700, Houston, Texas 77056 or by calling 888.446.3773. You should read the prospectus carefully in order to fully understand the objectives, risks, sales charges, fees and expenses of HMS Income Fund before investing or sending money.