Business Development Companies (BDCs)) have been around for a while, but their popularity with investors took off over the past few years as they have sought yield alternatives. For those not familiar with them, they are partnerships that are able to pass through income without paying corporate tax, similar to the REIT structure. BDC Reporter published a great primer. Here are the main points:
- Structure created in 1980 as amendment to the 1940 Act
- At least 70% of total assets must be "qualifying"
- 90% of taxable earnings must be distributed
- Assets must be diversified
- Leverage is limited - total debt can't exceed total equity
Broadly speaking, these companies invest their assets primarily in loans to small and medium-sized businesses. I tend to think of them as "B" rated credits, though each BDC is somewhat different.
For those who choose to invest in the sector, there are some incredible resources here on Seeking Alpha, including Nicholas Marchi and Phil Mause. I took a deep look at the sector in late 2011, when Irecommended the sector to income investors. I noted that not all BDCs are equal when it comes to management, and followed up with a series of articles focused on assessing management at each of the BDCs.
Van Eck Global has just announced the first ETF, Market Vectors BDC Income ETF (BIZD).
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