BDCs Re-Gain Investment Spotlight
Business development corporations (“BDCs”) channel capital into privately held small businesses. Recently, enticing yields of 10% or more have renewed investor interest in BDCs.
BDCsinvest in the debt or stock of private and very small domestic public companies and often participate in “leveraged loans” secured loanswith below investment grade ratings. Currently, BDCs account for about $1 in every $20 of leveraged loan financing.
The eight largest BDCs offer yields of 6% to 12%, consisting of ordinary income and tax-advantaged long term capital gains. BDCs can borrow money in debt for each 70% to 100% of money in equity at lower rates than they lend to their portfolio companies. And BDCs are exempt from corporate income tax as long as they pay out at least 90% of their profits to their investors.
BDCs usually take an ownership stake in their portfolio companies, in the form of common stock or warrants and must report quarterly gains and losses. And because of the illiquid nature of their investment, BDC fund’s net asset value calculation is less precise than that of a liquid closed-end fund.
In addition to illiquidity concerns, experts advise that an evaluation of BDCs should include an examination of the fund’s investment strategy, a review of its portfolio and track record, and a understand the personality of each company.
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