Business Development Companies (BDCs)
Business development companies (BDCs) invest in private companies. Similar to how private equity or venture capital investors operate, BDCs make loans and often take ownership stakes in their client companies and provide managerial assistance.
In 1980, Congress created BDCs as a means to allow average investors the opportunity to invest in private equity companies. Prior to the creation of BDCs, these kinds of potentially lucrative private equity and venture capital investments were largely limited to wealthy investors and private firms.
BDCs may be liquid investments that publicly traded on a stock exchange or largely illiquid investments that do not trade on an exchange, such as NexPoint Capital. Whether traded or untraded, BDCs are predominately regulated investment companies that pool investor funds to acquire a portfolio of debt or equity of private American companies.
Characteristics of BDCs
The general characteristics of a non-traded business development company:
- Do not pay corporate taxes on their earnings, but are required to distribute 90 percent of their taxable income to shareholders.
- Invest at least 70 percent of their assets in privately held or thinly traded companies.
- Provide managerial assistance to their client companies.
- Governed by an independent board of directors.
- Make regular public filings with the Securities & Exchange Commission (10-Ks, 10-Qs, 8-Ks, etc.)
- Leverage is limited to 50 percent loan to value.
- Little to no correlation to publicly traded stocks and bonds.
- Can provide a potential hedge against inflation.
- Quarterly portfolio valuations.
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