Private Credit Demand And M&A Activity Will Support Long-Term Stability In This BDC

Catalysts

About Goldman Sachs BDC

Goldman Sachs BDC provides private credit solutions to middle market and larger companies, primarily through senior secured lending.

What are the underlying business or industry changes driving this perspective?

• Resurgent M&A activity supported by substantial private equity dry powder and a sustained risk-on sentiment is expanding high-quality deal flow. This dynamic should support steady growth in originations and investment income.
• The rotation out of pre 2022 legacy assets into newly underwritten first lien loans is upgrading portfolio quality and yield resilience. This trend should help stabilize net asset value and support earnings consistency.
• Deeper integration with the broader Goldman Sachs ecosystem, including investment banking relationships and sole lender roles on complex transactions, is enhancing GSBD's access to proprietary transactions. This access should underpin spreads and fee income that compare favorably to the market.
• Growing demand for private credit as an alternative to public markets financing, particularly for larger take-private and sponsor-backed deals, is enlarging GSBD's addressable market. This expansion should help drive long-term revenue and scale efficiencies in operating margins.
• Disciplined balance sheet management, reflected in below-target leverage, predominantly unsecured funding and ample revolver capacity, positions GSBD to deploy capital quickly into attractive credits as markets remain active. This positioning should support net investment income and dividend coverage.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Goldman Sachs BDC's revenue will decrease by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 34.7% today to 49.2% in 3 years time.
• Analysts expect earnings to reach $138.6 million (and earnings per share of $1.3) by about December 2028, up from $133.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, up from 8.6x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 2.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.35%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A sustained wave of M&A and take private activity supported by abundant private equity dry powder and lower base rates could structurally increase GSBD's volume of high quality originations. This could allow it to grow total investment income and net investment income meaningfully over time, which would be inconsistent with a flat share price scenario that ignores compounding earnings power.
• If GSBD continues to rotate aggressively out of pre 2022 legacy assets and into newly originated first lien loans while maintaining stable or improving nonaccrual levels, the portfolio's risk adjusted yield and credit quality could rise. This could support higher net margins and earnings and potentially warrant a higher valuation multiple rather than a stagnant share price.
• GSBD's ability to repeatedly act as lead or sole lender on large, complex financings through the broader Goldman Sachs ecosystem may entrench a durable competitive advantage in sourcing proprietary deals at attractive spreads and fees. This could drive above industry revenue growth and expanding returns on equity that contradict expectations for a flat equity value.
• Management's decision to proactively reset the dividend policy while still delivering high double digit annualized net investment income yield on book value could prove conservative. If future earnings growth allows for dividend stability or increases, the market may re rate the stock upward in line with improving dividend coverage and earnings visibility.
• Structural tailwinds for private credit as borrowers increasingly favor private over public financing, combined with GSBD's underlevered balance sheet and significant unused revolver capacity, may enable leveraged but prudent balance sheet growth. This could amplify net investment income and long term earnings per share beyond what a flat share price assumption would imply.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $10.25 for Goldman Sachs BDC based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $281.5 million, earnings will come to $138.6 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 12.4%.
  
• Given the current share price of $10.05, the analyst price target of $10.25 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.