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The Rise of Business Development Companies

Lately, there has been a lot of buzz surrounding business development companies and people’s preference toward them as opposed to investment banks. Business development companies are essentially publicly traded closed-end funds that provide capital appreciation and income. BDCs give smaller companies the capital they need for growth. They are independent and answer to their own board of directors. BDCs are a combination of an investment company and an operating company that provide financing to small- and mid-sized businesses.

Small to mid-sized businesses prefer BDCs to investment banks because investment banks are highly regulated by the Federal Reserve. BDCs represent a transparent portfolio of loans that can be traded publicly with little to no regulation. This is appealing to businesses as they don’t want to be heavily regulated. Getting a loan from a BDC also means that the business in question knows exactly what the terms of the loan are, how much they are, and when they’ll have to pay the loan back. BDCs have helped many distressed companies regain their financial stability.

Many BDCs choose to be regulated investment companies (RICs) for tax reasons. They must distribute at least 90% of their investment company income to shareholders every year. That’s what makes them such an attractive investment. This also includes their capital gain net income and any income not distributed in previous years. 

BDCs have garnered so much positive attention recently because of their high distribution yields relative to fixed income investments and their protection against different types of risk such as leverage, market, credit or liquidity risk. Investors that buy BDCs are usually looking for high yields from dividends or a different option from exchange-traded funds or mutual funds. The speed with which BDCs are growing is exponential according to current IPO data.

BDCs are very similar to venture capital funds. They both invest in businesses but the difference is access. Usually, venture capital funds are only available to large institutions, high net worth individuals and accredited investors. They have a limited number of investors. BDCs are available to anyone who has access to a stock exchange. Anyone at all can invest in a BDC and here are some tips on getting started. Each BDC has a ticker symbol. Investors can buy shares in their IRA or brokerage account. However, you should assess your own risk tolerance and meet with a financial advisor before buying shares.

Photo credit: Business Development Company Stocks — Try These 2 for Huge Yields (moneyandmarkets.com)

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