A business development company (BDC) is an organization that invests in small businesses and middle market companies to aid early growth, or to help distressed companies until they regain sound financial footing. BDC exchange-traded funds (ETF) provide investors with access to private market companies and private credit. As portfolio companies, BDCs offer potentially high dividend yields that come with equally high risks. Savvy investors might consider this option if they have a high level of risk tolerance for volatility and a deep understanding of the investment structure.
BDCs have been compared to venture capital funds or private equity funds, which offer access to private, often illiquid, investments and may provide assistance as lenders to the companies they invest in. However, BDCs are open to all investors, including retail investors.
Potentially high yield
Flexible investments
Good diversification
They help provide small to middle-sized companies with the needed financing to continue business as usual.
Common types of BDCs include:
StructureA BDC is structured very similarly to a Real Estate Investment Trust (REIT) in the fact that it’s a closed-end investment. BDCs are technically Regulated Investment Companies (RIC) and investors can’t withdraw money from the fund like they would with, say, a mutual fund investment. Closed-end funds and business development companies frequently trade at a discount to their net asset value.
Payouts for Non-Traded BDCsInstead, BDCs can be non-traded or may trade on a public stock exchange and have unique liquidity requirements. Publicly traded BDCs are regulated investment companies and must make an allocation of over 90% of their profits to shareholders in the form of dividends.
BDCs are typically invested in illiquid securities, which can lead to good diversification opportunities but also liquidity risk.
BDCs must be registered in compliance with Section 54 of the Investment Company Act of 1940 and follow valuation process requirements to determine market value. Once you have determined that a BDC investment is suitable for you, it can be purchased with your Self-Directed IRA or other retirement account at Mainstar Trust. Our investment management team can help execute your investment strategy, manage filings with the Securities and Exchange Commission, as well as serve as a brokerage providing managerial assistance other types of equity investments. Click below to find out how to use a Mainstar Trust account to invest in a BDC.