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:

"Twelve years with ValueForum. I have been retired now for about 1 year. My two girls are both in expensive private colleges, one is an engineering major and one is graduating this year and will be going on to Med-school. I am not worried about how I will afford this. The affect of VF on my retirement is nothing short of astounding. This year I have made more money with my investments in the last 6 months than two years of my old salary as a very high paid microchip engineer. I don't worry about money, and I simply enjoy the process of investment and discussions with my good friends on VF, what I like to call my VF family. I have been with these folks on VF for over a dozen years, through thick and thin; through the highs of 2006 and the melt down of 2008 and back to the highs of 2014, all of it. I can honestly tell you it has been the best thing I could have found for investing. PERIOD. It has also been a great place to meet wonderful caring, sharing people. I look back and have calculated that my average compound rate of return or CAGR over the dozen years is about 24%. Do the math you will see that it means that I have about 13 times what I started with, all this while providing for my family etc. When people ask me what they should do with to start investing, I always tell them "spend the first on a year's subscription to ValueForum." It is the BEST advice I can give them. You can give a man a fish, or you can teach him to fish. With a ValueForum membership and some diligent time spent studying they will turn that into many many thousands. I am convinced of it. New members please treat VF as the jewel it is. Always post with respect for the other members. NEVER use harsh language or words. If someone wrongs you, turn the other cheek. It is just not worth it. VF is much too valuable to tarnish or damage. Thanks for Joining ValueForum, you will never regret it if you follow those rules above. VF is simply the BEST investment forum on the planet and you have found it. Congratulations, and thank who ever told you about it. - Dig4value."

 

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