BDCs are publically traded special investment vehicles that invest directly in private companies. BDCs are effectively a form of publically traded private equity, and offer non-acredited investors an opportunity to gain exposure to what are generally private middle market operating companies.
Q. So this stands for “Business Development Company”, but what’s that mean?
A. These are special investment vehicles that are sort of like mutual funds or MLPs for direct investment in private companies: a form of publically traded private equity. They tend in invest in middle market and smaller companies.
Q. So, a little like a VC or small PE investment, but with liquidity? Sounds interesting.
A. Right, and also no big initial investments to get in; these aren’t limited to accredited investors. One other point is that they have to pay all essentially all income currently, so they tend to generate decent yield for investors. So, overall, the idea is pretty appealing, and, frankly, I’ve always been surprised that they haven’t become a little more popular.
Q. What kind of investments do they make?
A. The focus is on operating, middle market companies. Some do debt deals, some do equity, some do both. Of course, the ones that do debt deals will throw off the most reliable distributions to investors.
Q. Can you give us some examples?
A. American Capital Strategies is a big one; MVC Capital is a smallish one. Apollo, Blackrock, and KKR also offer them. So there’s no shortage. Of course, we’re not making recommendations here, just pointing out these things exist.
Q. And are they all publically traded?
A. Those are, but there’s a little bit of a trend to non-traded BDCs, a little bit like you’ve seen several non-traded REITs spring up over the past few years. But I’d be a little carful about them; I’ve seen several with very high sales charges, and, of course, a key benefits of most BDCs is liquidity, after all. So as an investor I’d have to think long and hard about the non-traded variety.