Business Development Corporations
Investing in Middle Market American Companies
What Are BDC Investments?
Business development companies (BDCs) were created by the U.S. Congress to stimulate investments in privately owned American companies. More specifically, BDCs are closed-end funds that invest in a company’s debt (loans) or equity with the goal of generating income, capital growth or both.
BDCs are registered with the U.S. Securities and Exchange Commission (SEC) and regulated under the Investment Company Act of 1940. These investments offer individual investors access to private debt, an asset class that typically has only been available to high-net-worth and institutional investors. By investing in a non-traded BDC, individuals are able to pool their capital to invest in private American companies.
Why Invest in Non-traded BDC's?
Today’s market offers traded and non-traded BDC options for investors seeking to add private debt investments to a portfolio. However, their share values may be influenced by general market sentiment and have higher correlation to the traded markets.
Non-traded BDCs, on the other hand, seek to provide investors with diversification outside the traded market. These types of investments are less liquid than their traded counterparts, but they have the potential to align the fund structure with the characteristics of the asset class in which they participate. As a result, non-traded BDCs may provide the diversification benefits of lower correlation to the traded market that are frequently associated with alternative investments.
Benefits, Risks and Suitability
Non-traded BDCs give individuals the ability to purchase shares in a managed portfolio of investments made to private American companies. Other potential benefits include:
- A complement to existing income-focused investments
- Institutional portfolio management
- Potential protection from rising interest rates
- Reporting transparency
Investors should consider the risks disclosed in a prospectus before investing in a non- traded BDC. Some risk considerations include:
- Limited liquidity and a redemption plan that is subject to suspension, modification and/or termination at any time
- Liquidations at less than the original amount invested
- Distributions that are not guaranteed in frequency or amount and may be paid from other sources than earnings
- Limited operating history and reliance on the advisor, conflicts of interest, and payment of substantial fees to the advisor and its affiliates
- Loans may default
How Non-traded BDC's Work
Non-traded BDCs combine the capital of many investors to own debt or finance a portfolio of businesses. These companies, in turn, intend to make earnings or interest payments to the non-traded BDC, whose objective is to pass qualifying income to its investors through distributions.
Non-traded BDCs must distribute at least 90 percent of their taxable income to qualify as a BDC (when the BDC is structured as a registered investment company) and avoid corporate income tax. In addition, the non-traded BDC structure allows for similar regulation, transparency and tax treatment as other commonly known funds.