Over the last five years, the BDC index has outperformed, generating 213% total return, comapred to 138% for investment-grade debt, 135% for high-yield debt, 128% for the S&P 500 index, 117% for REITs and 96% for leveraged loans.
Looking ahead, BDCs will capitalize on the more strict banking regulations. Due to new rules, banks are limited from making loans unless more than 50% of the debt can be repaid within five to seven years. Consequently, BDCs can step in and help lend to private middle-market companies.
However, Eliasek warns that many BDCs have small balance sheets with limited ability to serve as the sole lender for many companies. Additionally, they are less diversified since some companies may also lack access to investment grade debt.
S&P Dow Jones Indices recently revealed that they are launching the S&P Business Development Company (BDC) Index. While no ETF has been tied to the index yet, it may be a sign another BDC ETF is coming soon.
For more information on BDCs, visit our business development companies category.
Max Chen contributed to this article.