Business Development Companies (BDC’s)
By: Tim McPartland,
A Business Development Company (also known as a BDC) is a public corporation that invests in small and mid sized companies through the use of loans or in some cases equity.
Typically the BDC is looking to invest in a company that will grow rapidly and profitably. Obviously the idea is to grow the investment. Generally the BDC makes loans to the company they are investing in, but at times they will take an equity position in the company they are backing.
Not unlike a REIT the BDC, generally organized as a Regulated Investment Company (RIC), must pay out 90% of their taxable income each year to their investors (you and I). The BDC organized as a RIC must also own no more than 10% of any companies voting securities and may not invest more than 5% of the BDC’s assets in any one security.
BDC’s range in size from under $100 million in assets to many billions of dollars in size. The investments they make range from rather small positions of 100’s of thousands of dollars up to tens of millions.
Because of the requirement that the BDC must pay out 90% of their taxable earnings each year these companies generally pay a sizable dividend (either Monthly or Quarterly)
As you can see below in the chart the yields are many times large, although like all yields–bigger is not always better. High yields normally correlate to high risk. One must research BDC’s just as they would any company to determine if the risk/reward equation is appropriate for your situation (we link to each companies website in the chart below). Your research will show that many of the BDC’s listed below make loans to riskier companies and charge very high interest rates–10 or 15% is very normal. Immediately this should help you understand that there is significant risk and it is our belief that shares in BDC’s should only be bought when the economy is stable or is growing.
GENERALLY dividends paid by BDC’s will NOT be qualified distributions for tax purposes (although there is a possibility with some BDC’s they will have some qualified and some non qualified).
Also investors should note that many BDC’s pay special dividends (additional payments made in addition to the regular quarterly payments). Those special payments are not reflected in our chart below as we list only the “normal” payments. The reason for the special dividends is because the BDC intends to pay a predictable quarter (or monthly) payment and at the end of the year they may have to pay the special to make sure they pay out 90% of their taxable income to maintain their BDC status.
Distributions Updated 4/6/2019