What Is a Business Development Company
Should You Invest in a Business Development Company (BDC)?
A business development company (BDC) is a type of closed-end investment company that is designed to invest in small- and mid-sized businesses, as well as distressed companies. With smaller companies, BDCs give them access to the capital they need for growth that they may not be able to access elsewhere. With distressed companies, they help to get the business back financially stable.
Investors that buy into BDCs are typically looking for high yields from dividends or an alternative investment vehicle to mutual funds and exchange-traded funds (ETFs). BDCs can be smart investment vehicles, but they are not for everyone. As is the case with any investment type, investors considering investing in a BDC should understand how they work and if their unique qualities align with their investment objectives and tolerance for risk.
How Business Development Companies Work
BDCs use their capital to make loans to or buy ownership in small- and mid-sized companies around the U.S. that are mostly privately owned. For tax purposes, most BDCs are treated as regulated investment companies (RICs) and not taxable entities. In exchange for the favorable tax treatment, the BDC must distribute at least 90% of its income to shareholders every year—similar to Real Estate Investment Trusts (REITs). Because of their high dividend and interest payouts, BDCs are often used by investors as income vehicles.
BDCs are similar to venture capital funds in that they both invest in businesses, but the key difference between them is access. Venture capital funds are generally only available to accredited investors, large institutions, and wealthy individuals, and they must limit their number of investors and enforce specific criteria not to be labeled as a RIC. BDCs, however, are open to anyone with access to a stock exchange.
How to Invest in a Business Development Company
You can invest in BDCs the same way as stocks, mutual funds, and ETFs. Each BDC has a ticker symbol, and investors can buy shares in their brokerage account or IRA. With mutual funds, investors can buy shares at the fund's net asset value, and the funds are not limited to certain number of shares. However, closed-end funds like BDCs issue a set number of shares through an initial public offering.
Largest Business Development Companies
Although Congress created the BDC form in 1980, most BDCs on the market today have only been around since the early 2000s, so there is not a large amount of information and history to analyze for making informed investment decisions. Investors thinking of investing in BDCs are wise to consider the largest ones with long track records. Here are the 10 largest BDCs, as measured by assets under management:
- Ares Capital Corp (ARCC): $7.47 billion
- Owl Rock Capital (ORCC): $6.02 billion
- FS KKR Capital Corp (FSK): 3.85 billion
- Prospect Capital Corporation (PSEC): $3.18 billion
- Golub Capital BDC, Inc (GBDC): $2.23 billion
- Main Street Capital Corp (MAIN): $1.54 billion
- New Mountain Finance Corp (NMFC): $1.28 billion
- Appolo Investment Corp (AINV): $1.22 billion
- Hercules Capital (HTGC): $1.17 billion
- TPG Specialty Lending, Inc (TSLX): $1.12 billion
The largest BDCs are not by default the best BDCs to buy. However, higher assets under management, along with long track records, is generally a good indicator. To begin your research, you may get initial information, such as price, earnings, and yield, from an unbiased investment research company like Morningstar.
The Bottom Line
Although BDCs may appear attractive—especially those that have high yields above 10%—higher yields can also bring high risk. Since many BDCs invest in small, privately-held businesses, there's a risk of severe declines in market value. As with any investment type, especially with alternative investment vehicles, investors should do their homework before investing in BDCs. After gaining a good understanding of the investment and how it works, the investor will need to determine if the BDC is appropriate for their investment objectives and risk tolerance.
The information on this site is provided for discussion purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
IRS. "Section 851.—Definition of Regulated Investment Company," Page 1. Accessed March 28, 2020.
SEC. "Closed-End Fund Information." Accessed March 28, 2020.
SEC. "SEC Adopts New Rules for Business Development Companies and Reproposes New Category of Eligible Portfolio Company." Accessed March 28, 2020.
BDC Investor. "Largest BDCs." Accessed March 27, 2020.