Business Development Companies (BDCs) are a unique type of investment combining characteristics of a closed-end investment fund and a publicly traded company. They invest comparably to private equity or venture capital firms, but as a result, they are riskier than stocks.
The BDCs invest money in the debt or equity of small-to-medium-sized private companies, mainly in the United States. They may invest in public companies, too. However, unlike private equity or venture capital firms, BDCs are traded on stock exchanges, making them accessible to small, unaccredited investors.
Some people like to invest in a BDC because they typically have a dividend yield greater than 10%. Consequently, they offer higher income streams than most common stocks, but the tradeoff is more risk.
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What is a Business Development Company?
Publicly traded BDCs are specialty finance companies domiciled in the United States. They have a hybrid structure with elements of closed-end investment funds but traded on stock exchanges like the New York Stock Exchange (NYSE) or Nasdaq. Although, some BDCs are privately held. Hence, they are considered a type of alternative investment that does not fall into the category of stocks, bonds, and cash.
Business development companies were created by Congress by the Small Business Investment Incentive Act of 1980. The aim was to allow small businesses to raise capital to grow and create jobs.
They Are Regulated Entities
They are regulated by the Investment Company Act of 1940, like mutual funds and closed-end funds. The 1940 Act restricts the use of leverage and requires disclosures about investments, operations, and management. Because they are registered with the Securities and Exchange Commission (SEC), BDCs must file current, quarterly, and annual reports. The investment managers may also be registered with the SEC.
Since 1980, the industry has grown, and today, roughly 49 publicly traded business development companies exist with a market capitalization of hundreds of millions to tens of billions of dollars. Dozens of privately held ones exist, too.
How Do BDCs Work?
A business development company invests money in debt or equity of small-to-medium-sized private and some public companies in the United States. Money is raised from retail and institutional investors through an initial public offering (IPO). Further capital is obtained by issuing additional shares or offering corporate bonds or hybrid securities. In most cases, post-IPO, a BDC issues debt for money.
These companies are usually at an early stage of development or distressed. Hence, their ability to raise capital from banks or investors may be constrained and they turn to BDCs. For instance, in the case of equity, BDCs may invest in preferred or common shares. In another example, BDCs may invest in senior secured, subordinated, or unsecured debt. They also issue loans and invest in convertible securities.
Sometimes, the companies are under duress, and the BDC provides management and leadership experience to improve operations.
Investing Requirements
A BDC must devote at least 70% of its assets to U.S. companies with less than $250 million market values. Thus, the majority of the investments are in private or thinly traded public companies seeking financing to grow. Consequently, the assets are illiquid, creating more significant risks. Additionally, when a BDC utilizes leverage, the risk may be amplified.
If a business development company sounds like a venture capital or private equity fund, it is because they follow a similar approach. However, BDCs are accessible to nonaccredited investors. On the other hand, venture capital and private equity funds seek out large institutions or very wealthy persons.
Advantages of BDCs
The four primary advantages of BDCs are high dividend yields, accessibility, liquidity, and diversification.
High Dividend Yields
Because they must distribute 90%+ of their taxable earnings, BDCs have higher dividend yields than most corporations. They often have dividend yields of 10%+, much greater than common stocks and even real estate investment trusts (REITs) or master limited partnerships (MLPs). Hence, this asset class attracts retirees and other persons seeking income.
However, since BDCs distribute a meaningful percentage of profits to investors, they may slash their dividend payouts during tough economic times, like the Great Recession or the COVID-19 pandemic.
Accessibility
Accessibility, compared to private equity and venture capital, is another plus. BDCs let unaccredited investors gain exposure to private equity-like investments not available in other ways. People also give exposure to investments in small, private companies by simply owning shares.
Liquidity of Shares
Next, the BDCs are liquid because they are publicly traded on stock exchanges. In contrast, private equity and venture capital investments have lock-up periods of one or more years and windows for sale. Also, a minimum investment amount is not required except for the share price. An investor can buy one share or as many as they desire at the market price.
Diversification
Lastly, BDCs add diversification to a portfolio. They do not have similar returns as stocks, bonds, REITs, or MLPs. They are an alternative investment class allowing people to spread their capital.
Disadvantages of BDCs
Business development companies also have disadvantages because of their risks. Their primary disadvantages are illiquid portfolio holdings, concentration, high-interest rates, and expensive management fees.
Illiquid Portfolio Holdings
A noteworthy disadvantage is the holdings are illiquid. The portfolio’s investments, whether equity, debt, or loans, are usually not liquid because the companies are small and under duress. Moreover, these securities are valued not on exchanges but through fair value estimates. As a result, the valuation can fluctuate depending on the models. Stocks and bonds are traded on an exchange. However, investments in private companies cannot be quickly sold or only sold on the secondary market, often at a loss.
Concentration
A BDC invests mainly in small-to-medium-sized private companies. As a result, its portfolio is concentrated. Many of these companies have similar characteristics. Hence, they may struggle during an economic downturn. Even though a business development company cannot place more than 25% of its assets in one company, concentration in illiquid or thinly held investments is a concern.
High-Interest Rates
A BDC usually borrows money to make investments because they do not retain much earnings. Like banks, they borrow at lower but lend at higher rates. If interest rates fluctuate, the net interest margin, known as the spread between the two rates, may narrow. This change impacts the ability to pay distributions.
Because business development companies have a lot of debt as a percentage of assets, they must refinance it. Rising interest rates make new debt more expensive and cause interest expenses to climb. In addition, higher interest rates may make new investments less profitable.
Expensive Management Fees
They typically have higher management fees than many other standard investments. For example, ETFs, or index funds, often have low expense ratios of 0.1% or less. Even stock trading has zero commissions. However, BDCs charge approximately between 1.5% and 2% of total assets under management (AUM). In addition, the fee structure often includes incentive payments reaching 20% of profits and some other costs. Consequently, total returns may be adversely impacted.
Higher Tax Rates for Shareholders
They have favorable tax treatment because BDCs are regulated investment companies. Hence, they do not pay corporate income tax, provided they distribute at least 90% of their taxable income. Instead, shareholders are taxed on the distributions as ordinary dividends at the regular income tax rate, similar to REITs. Although BDCs have a tax advantage, shareholders do not.
List of BDCs
Stock Rover* and Portfolio Insight* were used to create this table.
| Ticker | Company | Dividend Yield | Dividend 5-Year Avg (%) | Dividend 10-Year Avg (%) | Payout Ratio | Price / Earnings | Cap ($M USD) |
|---|---|---|---|---|---|---|---|
| ARCC | Ares Capital | 9.10% | 3.70% | 2.40% | 66.20% | 7.4 | $13,269 |
| BBDC | Barings BDC | 10.60% | 13.20% | -7.00% | 98.10% | 9.3 | $1,068 |
| BCSF | Bain Capital Specialty | 10.00% | - | - | 84.00% | 8.4 | $1,085 |
| BXSL | Blackstone Secured | 10.30% | - | - | 79.60% | 7.7 | $6,316 |
| CCAP | Crescent Capital BDC | 10.20% | - | - | 63.50% | 6.6 | $678 |
| CGBD | Carlyle Secured Lending | 10.90% | 4.90% | - | 89.30% | 9.1 | $879 |
| CION | CION Invt | 9.40% | - | - | 65.40% | 5.1 | $634 |
| CSWC | Capital Southwest | 10.00% | 9.90% | 20.40% | 145.10% | 14.7 | $1,194 |
| FDUS | Fidus Investment | 13.00% | 7.90% | 4.10% | 78.30% | 5.9 | $642 |
| FSK | FS KKR Capital | 13.90% | -1.60% | -2.30% | 124.40% | 9 | $5,648 |
| GAIN | Gladstone Inv | 6.90% | 3.30% | 2.90% | 47.30% | 6.8 | $534 |
| GBDC | Golub Capital BDC | 10.30% | 5.20% | 2.50% | 95.60% | 9.5 | $4,014 |
| GECC | Great Elm Capital | 14.10% | - | -11.30% | 102.20% | 7.3 | $103 |
| GLAD | Gladstone Cap | 8.20% | 3.30% | 1.70% | 55.90% | 6.8 | $525 |
| GSBD | Goldman Sachs BDC | 13.10% | 0.00% | - | 216.90% | 16.5 | $1,603 |
| HTGC | Hercules Capital | 9.60% | 8.40% | 4.50% | 106.70% | 11.2 | $3,253 |
| KBDC | Kayne Anderson BDC | 10.00% | - | - | 29.80% | 11.9 | $1,136 |
| LRFC | Logan Ridge Finance | 5.30% | - | -19.60% | - | - | $64 |
| MAIN | Main Street Capital | 7.50% | 5.30% | 4.10% | 74.60% | 9.5 | $4,469 |
| MFIC | MidCap Financial | 11.40% | -3.30% | -4.50% | 88.90% | 7.8 | $1,255 |
| MRCC | Monroe Cap | 12.10% | -6.50% | -3.00% | 270.30% | 22.3 | $178 |
| NMFC | New Mountain Finance | 11.50% | 0.00% | 0.00% | 124.60% | 10.9 | $1,278 |
| OBDC | Blue Owl Capital | 10.00% | - | - | 95.00% | 8.3 | $5,779 |
| OBDE | Blue Owl Capital | 9.60% | - | - | 34.90% | 7.3 | $1,808 |
| OCSL | Oaktree Specialty Lending | 13.40% | 14.10% | -3.40% | 250.00% | 18.6 | $1,347 |
| OFS | OFS Capital | 16.60% | 0.00% | 0.00% | - | - | $109 |
| PFLT | PennantPark Floating Rate | 10.60% | - | 1.30% | 74.10% | 7 | $855 |
| PSBD | Palmer Square Capital BDC | 11.90% | - | - | 37.20% | 6.1 | $514 |
| PSEC | Prospect Capital | 13.70% | 0.00% | -5.90% | 200.00% | 15.4 | $2,272 |
| PTMN | Portman Ridge Finance | 15.00% | 2.80% | -12.10% | 209.10% | 13.9 | $169 |
| RAND | Rand Capital | 6.90% | - | - | 24.80% | 4 | $43 |
| RWAY | Runway Gwth Fin | 17.30% | - | - | 246.70% | 13.9 | $400 |
| SAR | Saratoga Investment | 12.70% | 5.70% | 32.30% | 236.40% | 19.2 | $319 |
| SCM | Stellus Cap Investment | 11.60% | 3.30% | 1.60% | 125.00% | 10.8 | $361 |
| SLRC | SLR Inv | 10.80% | 0.00% | 0.20% | 87.70% | 8.1 | $825 |
| TCPC | BlackRock TCP Cap | 16.60% | -1.10% | -0.60% | - | - | $703 |
| TPVG | TriplePoint Venture Growth BDC Corp. | 17.60% | -3.60% | - | - | - | $284 |
| TRIN | Trinity Cap | 14.80% | - | - | 119.10% | 8.3 | $737 |
| TSLX | Sixth Street Specialty | 10.30% | 6.10% | 3.30% | 89.00% | 8.7 | $1,908 |
| WHF | WhiteHorse Finance | 13.10% | 1.60% | 0.80% | 155.60% | 12 | $272 |
Dividend Calendar for BDCs
Stock Rover* was used for creating this table.
| Ticker | Company | Ex-Dividend Date | Dividend Record Date | Dividend Payment Date | Dividend Frequency | Next Dividend Payment Per Share | Dividend Per Share |
|---|---|---|---|---|---|---|---|
| ARCC | Ares Capital | 9/13/24 | 9/13/24 | 9/30/24 | 4 | $0.48 | $1.92 |
| BBDC | Barings BDC | 9/4/24 | 9/4/24 | 9/11/24 | 4 | $0.26 | $1.04 |
| BCSF | Bain Capital Specialty | 9/30/24 | 9/30/24 | 10/31/24 | 4 | $0.42 | $1.68 |
| BXSL | Blackstone Secured | 9/30/24 | 9/30/24 | 10/25/24 | 4 | $0.77 | $3.08 |
| CCAP | Crescent Capital BDC | 9/30/24 | 9/30/24 | 10/15/24 | 4 | $0.42 | $1.86 |
| CGBD | Carlyle Secured Lending | 9/30/24 | 9/30/24 | 10/17/24 | 4 | $0.47 | $1.88 |
| CION | CION Invt | 9/3/24 | 9/3/24 | 9/17/24 | 4 | $0.36 | $1.11 |
| CSWC | Capital Southwest | 9/13/24 | 9/13/24 | 9/30/24 | 4 | $0.64 | $2.56 |
| FDUS | Fidus Investment | 9/19/24 | 9/19/24 | 9/26/24 | 4 | $0.57 | $2.51 |
| FSK | FS KKR Capital | 9/11/24 | 9/11/24 | 10/2/24 | 4 | $0.70 | $2.80 |
| GAIN | Gladstone Inv | 10/4/24 | 10/4/24 | 10/14/24 | 12 | $0.08 | $0.96 |
| GBDC | Golub Capital BDC | 11/29/24 | 11/29/24 | 12/13/24 | 4 | $0.39 | $1.56 |
| GECC | Great Elm Capital | 9/16/24 | 9/16/24 | 9/30/24 | 4 | $0.35 | $1.40 |
| GLAD | Gladstone Cap | 9/20/24 | 9/20/24 | 9/30/24 | 12 | $0.17 | $1.98 |
| GSBD | Goldman Sachs BDC | 9/30/24 | 9/30/24 | 10/28/24 | 4 | $0.45 | $1.80 |
| HTGC | Hercules Capital | 8/13/24 | 8/13/24 | 8/20/24 | 4 | $0.48 | $1.92 |
| KBDC | Kayne Anderson BDC | 9/30/24 | 9/30/24 | 10/15/24 | 4 | $0.40 | $1.60 |
| LRFC | Logan Ridge Finance | 8/22/24 | 8/22/24 | 8/30/24 | 4 | $0.33 | $1.28 |
| MAIN | Main Street Capital | 10/8/24 | 10/8/24 | 10/15/24 | 12 | $0.25 | $3.81 |
| MFIC | MidCap Financial | 9/10/24 | 9/10/24 | 9/26/24 | 4 | $0.38 | $1.52 |
| MRCC | Monroe Cap | 9/16/24 | 9/16/24 | 9/30/24 | 4 | $0.25 | $1.00 |
| NMFC | New Mountain Finance | 9/16/24 | 9/16/24 | 9/30/24 | 4 | $0.34 | $1.36 |
| OBDC | Blue Owl Capital | 9/30/24 | 9/30/24 | 10/15/24 | 4 | $0.37 | $1.48 |
| OBDE | Blue Owl Capital | 11/29/24 | 11/29/24 | 12/13/24 | 4 | $0.35 | $1.40 |
| OCSL | Oaktree Specialty Lending | 9/16/24 | 9/16/24 | 9/30/24 | 4 | $0.55 | $2.20 |
| OFS | OFS Capital | 9/20/24 | 9/20/24 | 9/30/24 | 4 | $0.34 | $1.36 |
| PFLT | PennantPark Floating Rate | 10/16/24 | 10/16/24 | 11/1/24 | 12 | $0.10 | $1.23 |
| PSBD | Palmer Square Capital BDC | 9/27/24 | 9/27/24 | 10/14/24 | 4 | $0.47 | $1.88 |
| PSEC | Prospect Capital | 10/29/24 | 10/29/24 | 11/19/24 | 12 | $0.06 | $0.72 |
| PTMN | Portman Ridge Finance | 8/22/24 | 8/22/24 | 8/30/24 | 4 | $0.69 | $2.76 |
| RAND | Rand Capital | 8/30/24 | 8/30/24 | 9/13/24 | 4 | $0.29 | $1.16 |
| RWAY | Runway Gwth Fin | 8/12/24 | 8/12/24 | 8/26/24 | 4 | $0.45 | $1.80 |
| SAR | Saratoga Investment | 9/11/24 | 9/11/24 | 9/26/24 | 4 | $0.74 | $2.96 |
| SCM | Stellus Cap Investment | 9/30/24 | 9/30/24 | 10/15/24 | 12 | $0.13 | $1.60 |
| SLRC | SLR Inv | 9/13/24 | 9/13/24 | 9/27/24 | 4 | $0.41 | $1.64 |
| TCPC | BlackRock TCP Cap | 9/16/24 | 9/16/24 | 9/30/24 | 4 | $0.34 | $1.36 |
| TPVG | TriplePoint Venture Growth BDC Corp. | 9/16/24 | 9/16/24 | 4 | $0.30 | $1.20 | |
| TRIN | Trinity Cap | 9/30/24 | 9/30/24 | 10/15/24 | 4 | $0.51 | $2.04 |
| TSLX | Sixth Street Specialty | 9/16/24 | 9/16/24 | 9/30/24 | 4 | $0.46 | $2.11 |
| WHF | WhiteHorse Finance | 9/18/24 | 9/18/24 | 10/2/24 | 4 | $0.38 | $1.54 |
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.