Let's talk about business development companies today. For the record, I love BDC's. They are banks on steroids with a lot less regulation.
BDC’s have been around since an amendment to the 40-act bringing them into being was passed back in 1980. A BDC must invest at least 70% of its assets in nonpublic US companies with a market value of less than $250M. 90% of cash flows have to be paid out to shareholders to avoid taxation at the corporate level.
BDC's can invest in any level of a company's capital structure, but debt has been the most popular strategy. From experience, I can tell you that when raising money from John Q. Public, a fat dividend makes the sales pitch a lot easier.
BDC's allow individual investors to invest in small to midsize private companies, much like private equity and venture capital funds are able to do. Often the loans they make will have some form of equity participation so we can collect fat interest checks and have some exposure to the potential upside of the business.
BDC's came into their own in the aftermath of the Great Financial Crisis of 2008-2009. Banks decided-or in many cases, were forced to -step away from riskier types of corporate lending, especially in the smaller company segment of the market. Banks were out of the buyout, and early-stage lending to growth businesses and BDC's stepped up to fill that void.
2021 should be a strong year for well-managed BDC's. The economy should continue to open, and we should see some of the service businesses begin to open as more of us are vaccinated. Margins should move higher as the fed keeps a lid on short rates and long rates drift higher as the economy recovers.
Already in 2021, we have seen ...