About Business Development Companies
Business development companies (BDCs) were created as a result of the 1980 Amendments to the Investment Company Act of 1940 (the 1940 Act). A BDC is a closed-end fund that is required to invest at least 70% of its assets in private or thinly traded public companies in the form of long-term debt and/or equity capital, with the goal of generating current income and/or capital gains. There are approximately 31 publicly traded BDCs operating today, with approximately $18 billion in capital in the aggregate, and another 14 BDCs currently in registration with the SEC.
BDCs may be internally managed, or they may be externally managed by a separate registered investment adviser. Approximately 70% of the BDCs operating today are externally managed and virtually every newly filed BDC is structured to be externally managed as well.
BDCs generally qualify to elect to be taxed as "regulated investment companies" under Subchapter M of the Internal Revenue Code for federal tax purposes, which regulates, among other things, the type of income the BDC may generate and the distribution of its net income to shareholders.
BDCs maintain a hybrid structure that captures elements of both funds and corporate registrants. Like all closed-end funds and mutual funds, BDCs are regulated by the Securities and Exchange Commission (SEC) under the 1940 Act, which requires, among other things, less than 1:1 debt-to-equity ratio, significant disclosure about the BDC's investments, operations, and management and prohibits many types of joint and affiliated transactions. Like traditional corporate registrants, BDCs file 10-Qs, 10-Ks and current reports on 8-K with the SEC.
Most BDCs are publicly traded with shares listed on one or more national exchanges. More recently, non-listed BDCs have emerged, a structure that non-listed REITs have used for years, which permits the BDC to raise capital in a continuous private offering and eliminate price volatility, but this also limits liquidity and the retail investors to whom the BDC can market. Many non-listed structures provided mechanisms for liquidity after a certain hold period. There are four non-listed BDCs operating today, with at least four more currently on file with the SEC. Given the recent filing activity for these non-listed structures, there appears to be increasing interest among management teams. To learn more about BDCs, please view "The ABCs of BDCs" and other related presentations.
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Benefits of the BDC
The graphic depicts one of the key benefits of BDCs relative to private funds: the ability to access public retail investors, since private funds are generally restricted to marketing only to qualified or accredited investors. In exchange for access to this substantial pool of investing capital, BDCs are regulated by the SEC under the provisions of the Investment Company Act of 1940. The 1940 Act provides important protections to retail investors, including restrictions on the use of leverage.
Retail investors control an important component of the public equity capital markets and can provide a "stickier" investor base, as compared to institutional investors, as retail investors tend to hold shares longer, appreciate current income from dividends, and can be less reactive to news (good or bad), which can provide some stability to the stock in volatile markets. A strong investor base has components of both institutional and retail investors.
BDC Index Launched
In February 2011, Wells Fargo announced the launch of the Wells Fargo Business Development Company Index, a rules-based index measuring the performance of certain NYSE and NASDAQ listed BDCs.
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