A Business Development Company, also known as a BDC, is an investment vehicle that invests in small- and medium-sized businesses. BDC investing is similar to venture capital and private equity, because it provides investors with a way to invest in small companies. Unlike venture capital and private equity funds, however, investments in a BDC are open to non-accredited investors; shares are bought and sold on the open market (many are NASDAQ-traded).
BDCs were created in 1980 by an act of Congress to help small businesses raise capital. Capital formation for small businesses, however, is still an issue, even though BDCs currently invest in roughly 3,000 small- and mid-sized businesses across the country. (This is one of the reasons the JOBS Act was signed into law).
Investment capital raised by BDCs remain under heavy scrutiny by the SEC, although there have been some recent reforms to laws pertaining to them, as well as emergency relief legislation that increased flexibility during the COVID-19 pandemic.
Nonetheless, BDC investing is popular, because:
Still, it’s important to remember that these securities are a relatively new type of investment vehicle, and risk can vary depending on the maturity of the companies in their portfolios—smaller, less mature companies may have more potential, but they also come with greater risk.
By law, 70% of the investments a BDC makes must be in:
For interested investors, you can find more resources and news related to BDCs at the BDC Reporter.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Due Diligence Before Investing and Alpha, Beta & Other Key Concepts. This is an updated version of an article originally published on March 26, 2014.]
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