The criteria by which investment companies are rated are leverage, liquidity, cash flow coverage of fixed costs and historical investment performance. They are also rated on the management expertise, "key man" risk, diversification of investments, risk of investment strategies and valuation of investments.Continue Reading
One of the main criteria is the investment company's leverage ratio, which is determined by the net debt, tangible equity and after-tax unrealized appreciation. A company that has a low leverage ration is funded with private equity and has a lower risk of default, giving it a higher rating. A company with a high leverage ratio is more likely to default on debts owed.
Another criteria is liquidity, the portion of investments that can be liquidated into cash and cover debt. Many investments have a certain life span and liquidate at a given date. Ratings based on liquidity depend on available cash for repayment of the principal and visibility on the source of cash. Liquidity also affects the cash flow coverage criteria, which outlines the money available to cover fixed costs.
An investment company is also rated on its history of investment performance. A company with steady realized gains and good pre-tax earnings are more likely to receive a high rating.Learn more about Investing