A Business Development Company ("BDC") is a form of unregistered closed-end investment company in the United States that invests in small and mid-sized businesses. This form of company was created by the

US Congress The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washin ...

in 1980 in the amendments to the

Investment Company Act of 1940 The Investment Company Act of 1940 (commonly referred to as the '40 Act) is an act of Congress which regulates investment funds. It was passed as a United States Public Law () on August 22, 1940, and is codified at . Along with the Securities Ex ...

. Publicly filing firms may elect regulation as BDCs if they meet certain requirements of the Investment Company Act. BDCs were created to provide small and growing companies access to capital and to enable private equity funds to access public capital markets. Under the legislation, a BDC must invest at least 70% of its assets in nonpublic US companies with market values of less than $250 million. Moreover, like REITs, as long as 90% or more of the BDC’s income is distributed to investors, a BDC is not taxed at the corporate level. While BDCs are allowed to invest anywhere in the capital structure, the vast majority of the investment has been debt because BDCs typically leverage their equity with debt (up to 2X their equity), and fixed income investing supports their debt obligations.

Regulation and tax structure

Election means the BDC must subject itself to all relevant provisions of the Investment Company Act, which (a) limits how much debt a BDC may incur, (b) prohibits most affiliated transactions, (c) requires a code of ethics and a comprehensive compliance program, and (d) requires regulation by the

Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...

(SEC) and subject to regular examination, like all mutual funds and

closed-end fund A closed-end fund (CEF) is a fund that raises capital by issuing a fixed number of shares which are not redeemable, and then invest that capital in financial assets such as stocks and bonds. Unlike open-end funds, new shares in a closed-end fund ...

s. BDCs are also required to file quarterly reports, annual reports, and proxy statements with the SEC. Some BDCs are publicly traded, while others are not. BDCs are usually taxed as regulated investment companies (RIC) under the

Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 2 ...

. Like

real estate investment trust A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping cente ...

s (REITs), as long as the RIC meets certain income, diversity, and distribution requirements, the company pays little or no

corporate income tax A corporate tax, also called corporation tax or company tax, is a direct tax imposed on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed a ...

. As a pass-through tax structure, RICs must distribute at least 90 percent of taxable income as

dividends A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...

investor An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...

s. Most BDCs distribute 98 percent of their taxable income to avoid all corporate taxation. (RICs fall under section 851 of the

; REITs fall under section 856.) At least two BDCs have stated that they intend to be taxed as a REIT. Because income is not taxed at the corporate level, distributions to investors are generally taxable for investors based on the type of income earned by the BDC. For example, ordinary income to the BDC is taxable for investors at ordinary income rates, while capital gains income to the BDC is generally taxable for investors at capital gains rates. Historically, BDCs are listed on a national stock exchange like the

NYSE The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its liste ...

NASDAQ The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...

. Recently, as is common for REITs, some BDCs have declined to list on an exchange. Unlisted BDCs are required to follow the same regulatory structure as listed BDCs.

Distinctiveness

BDCs are similar to

venture capital Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which h ...

(VC) or

private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...

(PE) funds since they provide investors with a way to invest in small companies and participate in the sale of those investments. However, VC and PE funds are often closed to all but wealthy investors. BDCs, on the other hand, allow anyone who purchases a share to participate in the open market. This feature often attracts money to newly public BDCs, thereby giving them a faster way to raise capital for investments than VC funds.

Larger BDCs

Among the largest BDCs by market value, are (in alphabetical order):
Apollo Investment Corp.
() * Ares Capital Corp. () *

BlackRock BlackRock, Inc. is an American multi-national investment company based in New York City. Founded in 1988, initially as a risk management and fixed income institutional asset manager, BlackRock is the world's largest asset manager, with trill ...

Kelso Capital Corp ()
FS KKR Capital Corp.
()
Gladstone Investment Corp
() * Golub Capital BDC, Inc. ()
Hercules Technology Growth Capital
()
Horizon Technology Finance Corporation
() * KCAP Financial, Inc ()
Medley Capital Corp
()
PennantPark Investment Corp
()
Prospect Capital Corp
() Some BDCs are non-traded, with $1 billion or more of assets under management. The largest non-traded BDCs are as follows:
FS Investment Corporation II

FS Energy & Power Fund

FS Investment Corporation III

Business Development Corp of America

TCW Direct Lending LLC

CĪON Investment Corporation

Sierra Income Corp

BDC ETFs

For public equity investors looking to invest in a fund focused on BDCs, there are two options: * VPC
Virtus Private Credit Strategy ETF
* BIZD
VanEck BDC Income ETF

References

External links