What is a Business Development Company (BDC)?
A Business Development Company (BDC) is an organization that invests in small and medium-sized businesses as well as in companies in difficulty. BDC helps small and medium-sized businesses grow in the early stages of their development. In difficult companies, BDC helps companies regain a solid financial base.
With a similar closed equity investment, many BDCs are typically public companies whose shares are traded on major exchanges such as the US Stock Exchange (AMEX), Nasdaq, and others. As investments, they can be somewhat high risk, but they can also offer high dividend yields.
According to Closed-End Fund Advisors, there are roughly 49 public BDCs as of May 2019.
Understand the business development company
UNITED STATES OF AMERICA. In 1980, Congress founded business development firms to fuel employment growth and help emerging US companies raise money. BDCs are closely involved in advising on the operation of their portfolio companies.
Many BDCs invest in private companies and sometimes in small public companies with low volume of trade. They provide permanent capital to these companies using a variety of sources such as equity, debt, and hybrid financial instruments.
A Business Development Company (BDC) is a type of mutual fund that invests in developing and financially troubled companies.
Many BDCs are publicly traded and open to private investors.
BDCs offer investors high dividend yields and some capital appreciation.
The heavy use of leverage and the targeting of BDCs by small or troubled companies make them relatively high risk investments.
Qualifiers as BDC
To qualify as a BDC, a company must be registered under Section 54 of the Investment Company Act of 1940. It must be a domestic company whose security class is listed on the Securities and Exchange Commission (SEC).
The BDC must invest at least 70% of its assets in US private or public companies with a market capitalization of less than $ 250 million. These companies are often startups looking for funding or companies that are or are suffering from financial difficulties. The BDC must also support companies in its portfolio with management.
BDCs versus venture capital
If BDCs are like venture capital, they are. There are a few key differences, however. One thing has to do with the type of investors everyone is looking for. Venture capital is mainly available to large institutions and high net worth individuals through private placements. Instead, BDCs allow smaller, unaccredited investors to invest in them and, consequently, in small development companies.
Venture capital retains a limited number of investors and must undergo specific asset-related tests in order not to be classified as a regulated investment firm. BDC shares, on the other hand, are usually traded on stock exchanges and are always available to the public as an investment.
BDCs that refuse to be listed on an exchange must follow the same rules as the listed BDCs. Less stringent credit forecasting, related party transactions, and stock compensation make the BDC an attractive form of integration for venture capitalists who were previously unwilling to take on the onerous regulation of an investment firm.
The upward trend of BDC Investment
BDCs offer investors exposure to debt and equity investments in mostly private companies - usually closed to investment.
Because BDCs are regulated investment companies (RICs), they must distribute more than 90% of their profits to shareholders. However, this RIC system means that they do not pay corporation tax on profits before distributing them to shareholders. The result is above-average dividend yields. According to “BDCInvestor.com”, the ten BDCs with the highest performance in May 2019 achieved a value between 10.82% and 14.04%.
Investors who receive dividends pay them tax at their standard tax rate. In addition, BDC investments can diversify an investor’s portfolio with securities that may have significantly different returns for stocks and bonds. The fact that they are traded on public exchanges naturally gives them a fair price.
Advantages of BDC
The disadvantage of BDC Investment
Although BDC itself is liquid, many of its holdings are not. Portfolio portfolios are primarily private companies or small publicly traded companies. Because most BDC holdings are usually invested in liquid assets, the BDC portfolio has subjective fair value estimates and can experience sudden and rapid losses.
These losses can be magnified because BDCs often use leverage - that is, they borrow the money they invest or lend to their target companies. Leverage can improve the return on investment (ROI), but it can also cause cash flow problems if the leveraged asset is reduced in value.
Target companies invested by the BDC usually have no historical or disturbing backgrounds. There is always the possibility of falling down or going bankrupt. Raising interest rates - making borrowing more expensive - can also hinder a BDC’s profit margins.
In short, BDCs are investing aggressively in companies that offer both revenue now and capital appreciation later. Therefore, they are recorded somewhat high on the risk scale.
Real-world BDC example
As of May 2019, CM Finance Inc. is the BDC with the highest income on the BDC investor list, with a market return and income of 14.04%. (CMFN). Based in New York, CMFN seeks total returns from current and capital appreciation mainly through loans, but also through equity investments in medium-sized companies. These middle market companies have revenues of at least 50 million. CMFN's total assets for 2018 were 301 million. CM Finance trades on the Nasdaq and averages 60,000 shares per day. The company has a market cap of about $ 97 million.