Business Development Company (BDC): Definition and How to Invest

What Is a Business Development Company (BDC)?

A business development company (BDC) is an organization that invests in small- and medium-sized companies as well as distressed companies. A BDC helps these firms grow in the initial stages of their development. With distressed businesses, the BDC helps the companies regain sound financial footing.

Similar to closed-end investment funds, most BDCs are public companies whose shares trade on major stock exchanges, such as the American Stock Exchange (AMEX), Nasdaq, and others. Some BDC are Private which is generally during their seed or emerging fund sponsor stage

KEY TAKEAWAYS

  • A business development company (BDC) is a type of closed-end fund that makes investments in developing and financially distressed firms. 
  • Many BDCs are publicly traded and are open to retail investors, some early stage BDC are Private.
  • BDCs offer investors high dividend yields on Debt and Venture Capital type appreciation potential.
  • BDCs’ may use leverage for small business or distressed company turnaround targeting which can make them relatively high-risk investments.

Understanding Business Development Companies (BDCs)

The U.S. Congress created business development companies in 1980 to fuel job growth and assist emerging U.S. businesses in raising funds. BDCs are closely involved in mentoring and developing the companies in their portfolios because it is in a BDC’s best interest to help them become successful.

BDCs invest in private companies and small public firms that have low trading volumes or are in financial distress. They raise capital through initial public offerings or by issuing corporate bonds and equities or forms of hybrid investment instruments to investors.

The raised capital is then used to provide funding for the struggling companies. BDCs can use different financial instruments to provide capital, but in general, most issue loans or purchase stocks or convertible securities from the companies.

Qualifying as a BDC

To qualify as a BDC, a company must be registered in compliance with Section 54 of the Investment Company Act of 1940. In addition, it must be a domestic company whose class of securities is registered with the Securities and Exchange Commission (SEC).

The BDC must invest at least 70% of its assets in private or public U.S. firms with market values of less than US$250 million. These companies are often young businesses seeking financing or firms suffering or emerging from financial difficulties. Also, the BDC must provide managerial assistance often called a “Mentoring Mandate” to the companies in its portfolio.

KEY FACT

Business development companies avoid corporate income taxes by distributing at least 90% of their income and realized capital gains to shareholders.

BDCs vs. Venture Capital

If BDCs sound similar to venture capital funds, they are. However, there are some key differences. One relates to the nature of the investors each seeks. Venture capital funds are primarily available to large institutions and wealthy individuals through private placements. In contrast, BDCs allow smaller, nonaccredited investors to invest in them, and by extension, in small growth companies.

Venture capital funds keep a limited number of investors and must meet specific asset-related tests to avoid being classified as regulated investment companies. On the other hand, BDC shares are traded privately and typically become traded on stock exchanges and are constantly available as investments for the public.

BDCs that decline to list on an exchange must follow the same regulations as listed BDCs. However, less stringent provisions for the amount of borrowing, related-party transactions, and equity-based compensation make the BDC an appealing form of incorporation to venture capitalists who were previously unwilling to assume the burdensome regulation of an investment company.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top