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 whether their unique qualities align with their investment objectives and risk tolerance.
What Is a Business Development Company?
Congress originally created business development companies in 1980 in order to add another source of stimulation to the economy. They were designed to create jobs by providing investment and management support to small- and mid-size companies. According to the Business Development Council, BDCs invest more than 70% of their assets in companies valued under $250 million.
- Acronym: BDC
According to the BDC Council, there are 93 BDCs in existence today, including 53 traded, 20 private, and 20 nontraded companies.
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 an 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 a certain number of shares. However, closed-end funds such as BDCs issue a set number of shares through an initial public offering.
BDCs are not considered a low-risk investment. You should assess your risk tolerance and discuss options with a financial advisor before purchasing stock.
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. If you're thinking of investing in BDCs, you would be 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): $6.96 billion
- Owl Rock Capital (ORCC): $5.70 billion
- Prospect Capital Corporation (PSEC): $3.20 billion
- FS KKR Capital Corp (FSK): $3.03 billion
- Golub Capital BDC, Inc (GBDC): $2.35 billion
- Goldman Sachs BDC Inc (GSBD): $1.57 billion
- Main Street Capital Corp (MAIN): $1.43 billion
- New Mountain Finance Corp (NMFC): $1.19 billion
- Hercules Capital (HTGC): $1.18 billion
- TPG Specialty Lending Inc. (TSLX): $1.14 billion
The largest BDCs are not by default the best BDCs to buy. However, higher assets under management and long track records are generally good indicators. To begin your research, you can get initial information, such as price, earnings, and yield, from an unbiased investment research company such as Morningstar.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
- Business development companies are a type of closed-end investment company meant to fund small-, mid-sized, and distressed companies.
- Many BDCs have high yields—even above 10%—but this also comes with greater 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.