Business development companies (BDCs) are increasingly garnering investor attention, primarily for their sky-high yields. If you are keen on investing in BDCs too, then we won’t judge you. But kindly note, like with every other type of investment, there are risks and pitfalls associated with BDC investing also. This means you must do your research and be quite particular about the business development company Melbourne you choose to put your money with.
What is a BDC?
Let’s learn a bit more about BDCs. Compared to more established firms, smaller or middle-level companies have a hard time raising capital the traditional way. These mid-level companies are private companies, usually non-investment grade, which is why traditional lending institutions such as banks are unlikely to offer them growth capital. A BDC fills the vacuum by offering equity financing and debt to mid-market firms.
Technically, a BDC is an RIC (regulated investment company). It’s a closed-end investment channel that investors cannot liquidate at will, unlike mutual funds. A BDC’s structuring is similar to REIT (real estate investment trust).
A BDC can refrain from remitting corporate taxes if it offers 90 percent of taxable income as dividends. Due to this requirement, BDCs end up keeping little earnings to themselves and have to raise capital from equity and debt markets to grow as an institution.
Types of BDCs
BDCs come in varieties. They vary in the kind of loans they generate, the industries they serve, etc. Some of them exclusively deal in floating rate loans. The rates go up when market interest rates rise. As an investor, you should look into these aspects before investing in a BDC. Also, BDCs could be externally and internally managed.
An externally managed BDC has a higher cost structure since the management doesn’t work for the firm. The management is taken care of by an external financial firm, which typically excels in mid-market lending and is given a hybrid fee comprising a base rate and performance fee. Usually, the performance fee is 20 percent of NAV (net asset value). Internally managed BDCs have their own set of rules and unique traits too.
Dividends and Payouts
Besides the 90 percent dividend payout, some BDCs could also offer special dividends at times. This is usually the resort when companies have not been consistent with their payouts and want to catch up. A special dividend scenario also happens when profits are higher than normal. Variable payouts is a trait that can also be identified with good BDCs at times, thanks to their business model structure devised for tax reasons.