What is a business development company (BDC)? How have these unique investment vehicles transformed an emerging sector into a rapidly growing industry? Why should business owners and investors care? Let’s dive into the basics…
Business development companies provide businesses with capital, and in turn, give people access to investments that were once exclusive to the wealthy.
The purpose of a BDC, like any investment company, is to invest its shareholders’ money to generate income and turn a profit. While venture capital and private equity funds are open to only a few wealthy investors, BDCs allow anyone to purchase a share on the open market. The result is a structure where many individuals are able to pool their money together to invest in private American companies. Congress created business development companies back in 1980 to provide capital to small and medium-sized businesses. Since then, BDCs have financed countless middle-market businesses, generating strong middle-market job growth in the process.
Compared to the 27 listed BDCs in 2009, the number of entities listed as BDCs rose to almost 50 by 2013 with a CAGR of 39% according to one study. One reason for this increase over the last decade is the strong, steady dividend yield that experienced BDCs offer its investors.
BDCs are structured as pass-through entities for tax purposes (Registered Investment Company or RIC), register and sell shares in public offerings under the SEC rules, and generally trade on national exchanges (although some BDCs sell through retail broker-dealer networks known as non-traded BDCs). BDCs are registered public funds; retail investors are eligible to invest in them.
In short, BDCs provide businesses with capital and guidance.
BDCs look at the entire business and its prospects for growth rather than just its credit history. They typically take on investments that are higher risk than most bank portfolios can tolerate. This means the BDC needs to truly understand a company’s business so it can form an ongoing relationship and help the company to expand. BDCs grow by doing their homework and maintaining investment discipline.
Today, banks are under increased scrutiny with tighter restrictions. There are fewer banks with lower market shares and their capital structures have become more conservative. As a result, BDCs remain a viable option for middle-market companies looking for capital.
With customized financial engineering at its disposal, a BDC takes on more financial engineering than just term loans. As solutions-oriented lenders, they partner with business owners, equity sponsors, fundless sponsors, family-owned businesses and management teams to craft capital structures that enable them to pursue their business plans.
BDCs are smart options for investors looking to strengthen and diversify their financial portfolios.
As many Americans enter retirement, their portfolios are starting to shift away from the traditional financial roadmap. Between longer life expectancy and the volatility of the market, many investors are seeking out more reliable options. With today’s BDC market boasting more than 84 BDCs (traded and nontraded), managing over $70 billion in assets, a growing number of investors are turning their sights on the sector. Today, there are now 57 publicly traded BDCs, allowing retail investors a chance to purchase shares in the growth of middle-market America.
BDCs help businesses expand and create jobs, thus helping to boost the country’s economy. Growing companies across the country rely on BDCs to finance new capital projects such as land, equipment, and factories. Take a look at this map to see the boom spreading across the United States.