A business development company (BDC) is a type of closed-end investment company. It 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; they may not be able to access it elsewhere. With distressed companies, BDCs help to get the business back financially stable.
Investors that buy into BDCs are often looking for high yields from dividends or an alternative investment vehicle to mutual funds and exchange-traded funds (ETFs). Investing in BDCs can be smart, but it's not for everyone. As is the case with any investment type, those looking into BDCs should understand how they work. And be sure to think about whether their unique qualities align with your objectives and risk tolerance.
What Is a Business Development Company?
Congress originally created BDCs 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 firms valued under $250 million.
- Acronym: BDC
According to the BDC Council, there are 93 BDCs that exist today. This includes 53 traded, 20 private, and 20 nontraded companies.
How Do BDCs Work?
BDCs use their capital to make loans to or buy ownership in small- and mid-sized companies around the U.S. They 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. This is similar to Real Estate Investment Trusts (REITs). Because of their high dividend and interest payouts, BDCs are often used as income vehicles.
BDCs are similar to venture capital funds. That's because they both invest in businesses. But the key difference between them is access. Venture capital funds are most often only available to accredited investors, large institutions, and wealthy individuals. They also must limit their number of investors and enforce specific criteria not to be labeled as an RIC. On the other hand, BDCs are open to anyone with access to a stock exchange.
How Can You Invest in a BDC?
You can invest in BDCs the same way as stocks, mutual funds, and ETFs. Each BDC has a ticker symbol; investors can buy shares in their brokerage account or IRA. With mutual funds, investors can buy shares at the fund's net asset value. The funds are not limited to a certain number of shares. But 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.
What Are the Largest BDCs?
Congress created the BDC form in 1980. But most BDCs on the market today have only been around since the early 2000s. This means there is not a large amount of information and history to look at in order to make informed 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 (AUM):
- 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. But higher AUM and long track records are good indicators in most cases. Begin your research by getting information, such as price, earnings, and yield, from an unbiased company such as Morningstar.
- 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, you should do your homework before investing in BDCs.