Business development companies, or BDCs, are closed-end investment companies created under the Investment Company Act of 1940 that invest in debt and equity of small public and privately held companies. The companies essentially help fund small $5 million to $100 million businesses. Ever since the financial crisis, regulators have clamped down on traditional lenders and made it harder for businesses to access public capital.
“That is forcing businesses into the shadow banking areas” such as BDCs, Mitts added.
Since the debt is typically senior secured and set to float with interest rate benchmarks, there is diminished rate risk. When the Fed raises rates, BDC loan interest rates pegged to the London Interbank Offered Rate, or LIBOR, will also rise. However, Mitts believes we would need an 80-basis point rise in LIBOR before BDCs benefit.
Furthermore, BDCs offer attractive income opportunities since they are required to pay out 90% of income in form of dividends. For instance, BIZD has a 8.17% 12-month yield, BDCS has a 8.01% 12-month yield and BDCL has a 18.15% 12-month yield.
For more information on BDCs, visit our business development companies category.
Max Chen contributed to this article.