Introduction to BDCs
History/Background:
Business development company (BDC) regulation was created in 1980 by Congress
The goal of BDC regulation was to encourage the flow of public equity capital to private businesses in the United
States
BDCs are:
Regulated by the Investment Company Act of 1940
Unique because they focus on investing in private companies, rather than publicly traded companies (BDCs are generally
required to invest at least 70% of their assets in private U.S. companies or public U.S. companies with market values of
less than $250 million)
Required to report to shareholders like traditional operating companies - file regular
quarterly and annual reports with the SEC
Required to make available significant managerial assistance to their portfolio companies
By investing in a BDC:
Shareholders enjoy the liquidity of a publicly traded stock, while participating in the private equity industry
BDC Regulation
To be treated as a "regulated investment company" (RIC) under Subchapter M of the Internal Revenue
Code a BDC must:
Qualify as a regulated investment company
Distribute to stockholders in a timely manner at least 90% of their "investment company taxable
income," as defined in the Internal Revenue Code -- this rule similar to that of Real Estate Investment Trusts (or
REITs for short) means that BDCs are typically high yielding stocks and therefore an important sector for income investors.
A BDC will receive an exempt status on the 4% nondeductible federal excise tax if they distribute to their
shareholders:
98% of their ordinary income for each calendar year
and
98% of their capital gain net income for the one-year period ending December 31 in that calendar year
and
Any income not distributed in prior years
In order to qualify as a regulated investment company for federal income tax purposes, the BDC must, among other
things:
Continue to qualify as a business development company under the 1940 Act
Derive in each taxable year at least 90% of their gross income from dividends, interest, payments with respect
to securities loans, gains from the sale of stock or other securities, or other income derived with respect to their
business of investing in such stock or securities (the "90% Income Test")
Diversify their holdings so that at the end of each quarter of the taxable year:
- At least 50% of the value of their assets consists of cash, cash items, U.S. government securities,
securities of other regulated investment companies, and other securities if such other securities of any one issuer do
not represent more than 5% of their assets or more than 10% of the outstanding voting securities of the issuer
- No more than 25% of the value of their assets is invested in the securities (other than U.S. government
securities or securities of other regulated investment companies) of any one issuer or of two or more issuers that are
controlled (as determined under applicable Internal Revenue Code rules) by the BDC and are engaged in the same or
similar or related trades or businesses (the "Diversification Tests'').
Investing In BDCs
Much like any other sector, investing in BDCs can be done through an ETF approach (such as the BIZD ETF), by purchasing
individual BDC stocks that are traded publicly on the NYSE or NASDAQ, or by purchasing shares in a "non-traded" BDC.
BDC Message Boards
Beginning in 2005, the message boards at BDCInvestor.com were merged into ValueForum.com (ValueForum, or "VF" for
short). VF member dig4value says:
"VF
is simply the BEST investment forum on the planet and you have found it. Congratulations, and thank who
ever told you about it." --
Learn more about ValueForum.
ValueForum is a members-only forum, but occasionally members will publish public posts. One such post on the subject of BDCs
was entitled
BDCs and Reflexivity Theory. For in-depth discussions about
BDCs with other investors, ValueForum is the place to be.
dig4value's full testimonial:
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