Question 1

What does BDC stand for?

Accepted Answer

In the stock market context, BDC stands for Business Development Company, a type of corporate structure popular for its high dividends, in which the company must pay out the vast majority of its earnings to shareholders.

Question 2

Are all BDCs publicly traded?

Accepted Answer

No, in addition to the publicly traded BDC stocks there are also non-traded BDCs as well.

Question 3

When were BDCs created?

Accepted Answer

BDC regulation was created by Congress in 1980.

Question 4

Why were BDCs created?

Accepted Answer

Congress created BDCs to encourage the flow of public capital to private companies throughout the USA.

Question 5

Do BDCs have to pay dividends?

Accepted Answer

To be treated as a Regulated Investment Company (RIC), a BDC must distribute at least 90% of its taxable income to shareholders.  That normally means BDCs have to pay dividends, but, if there are no taxable earnings then no dividend is required (stated differently, the level of dividends will be tied to the level of a BDC's profits).  In theory a BDC could also elect not to be treated as a RIC.  But since being a RIC means the BDC avoids corporate level income tax, there are very limited circumstances where it would make sense to give up the RIC election.

Question 6

Are BDCs safe investments?

Accepted Answer

Typically a BDC maintains a diversified portfolio made up of equity and/or debt that is below investment grade.  However, a diversified portfolio of below investment grade credit instruments can often support an investment grade rating at the BDC level itself, with many BDCs having issued investment grade debt &mdash; one recent issuance we noticed garnered an A- rating from a nationally recognized statistical ratings organization (NRSRO).  Some BDCs also issue exchange traded debt and/or preferred shares, which rank senior to the common stock, offering a higher degree of safety than the common, in exchange for a lower yield than is offered by the common stock.  (See our BDC Baby Bonds page).

Question 7

Can anyone invest in a BDC?

Accepted Answer

Any publicly traded BDC can be bought or sold just like any other stock on the exchange, without restriction.  There are also stock options (puts and calls) traded for many of the BDCs.

Question 8

Do BDCs issue K-1's or 1099's?

Accepted Answer

BDCs issue 1099's, not K-1's.  It is important to remember that by paying 90% of their taxable earnings as dividends, BDCs avoid income tax at the corporate level.  This also means that BDCs held in a taxable account generate dividends that are typically taxable at ordinary income rates, as opposed to the qualified dividend rate, although there is company-by-company and year-by-year variation in tax characteristics and each individual BDC will announce its own tax reporting information each year.

Question 9

What is BDC in private equity?

Accepted Answer

Business Development Companies, or BDCs for short, are found among the top components of the PSP private equity ETF.  BDCs often take equity stakes in private companies, making them private equity players in that sense, but more often BDCs invest in private debt (buying private bonds or extending loans to a privately held business).

Question 10

How does a BDC make money?

Accepted Answer

BDCs make money by investing in either the debt or equity of private companies.  In the case of an equity investment, the BDC would make money if the value of the portfolio company increases over time.  In the case of a debt investment, much like any other type of loan the borrower would be required to pay interest.  That interest income then flows to the top line of the BDC.

Question 11

Can BDCs invest in real estate?

Accepted Answer

BDCs are generally required to invest at least 70% of their assets in the debt or equity of private U.S. companies (or very small public companies).  That leaves a 30% bucket with which the BDC can invest in other areas, such as real estate.  However, investors interested in real estate are better off looking into Real Estate Investment Trusts (REITs), an asset class to which BDCs are often compared due to the similar requirement to pay out the bulk of taxable income in the form of shareholder dividends.

Question 12

Are all BDCs externally managed?

Accepted Answer

No.  Although many BDCs are managed by an external advisor and do not actually have their own employees, internally managed BDCs also exist.  Here at BDC Investor we have an information page for each BDC (use the drop-down list in the menu bar), and there is a section on each page describing the management structure.  Two example internally managed BDCs are MAIN and CSWC.

Question 13

Where can I find your BDC message boards / discussion forum?

Accepted Answer

Our BDC Investor message boards have moved to BDCs.valueforum.com.

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