Business Development Companies (BDC)

A Business Development Company (BDC) is an investment vehicle created by Congress in 1980 to help support small and mid-sized American businesses — the kinds of companies that are too big for a traditional bank loan but too small to easily raise money on Wall Street.

Think of a BDC as a fund that provides:

loans,
equity investments,
or a mix of both
to growing private companies.

These businesses often need capital to expand, hire employees, build new facilities, or launch new products. BDCs fill that financing gap.

There are two main types:

Publicly traded BDCs (listed on stock exchanges)
Non-traded BDCs (sold through advisors, similar to Non-Traded REITs)

BDCs typically invest in private credit, meaning loans to private companies.
These loans often:

Pay attractive interest rates
Are secured by the company’s assets
Sit high in the company’s capital structure (which can reduce risk)

Some BDCs also take equity stakes, giving investors a chance to benefit if a company grows or goes public. BDCs can and do invest in all different types of businesses and sectors and can hold hundreds of companies at once, creating instant diversification.

If Non-Traded REITs are about owning real estate, BDCs are about owning private credit and private business exposure — two parts of the market historically reserved for institutional investors.

Investors like BDCs because they offer:

High income potential (often higher than bonds)
Exposure to private businesses
Diversification away from public markets
Professional underwriting and monitoring of each loan or investment

For many, BDCs provide access to a corner of the economy they couldn’t reach otherwise.

How BDCs Make Money

BDCs earn income primarily through:

Interest from loans they provide to private companies
Fees charged to those companies
Potential gains on equity stakes when companies grow or are sold
Structuring advantages like floating-rate loans (rates rise when market interest rates rise)

Most BDCs are designed to pass most of this income on to investors through regular dividends.

Benefits of Investing in BDCs

1. Attractive Income Potential

BDCs are required by law to distribute at least 90% of their taxable income to investors.
This often leads to high, steady dividend yields.

2. Access to Private Credit

Private credit markets have grown rapidly and often offer:

higher yields than public bonds
more control through negotiated loan terms
strong protections for lenders

BDC investors gain access to this entire ecosystem.

3. Floating-Rate Features

Many BDC loans have floating interest rates, meaning the rate adjusts when general market interest rates change.
This can help BDCs:

protect against inflation
generate higher income when interest rates rise

4. Professional Oversight

BDCs employ teams of credit analysts, portfolio managers, and industry specialists who:

evaluate companies
structure loans
monitor performance
negotiate protections

This reduces the risk of lending to private companies on your own.

5. Diversification

Because BDCs often hold dozens or hundreds of companies, one problem borrower doesn't usually sink the whole fund.

Considerations and Risks

1. Credit Risk

If a company they lend to struggles, the BDC may need to:

renegotiate the loan
take a loss
or take over some company assets

This risk is managed but not eliminated.

2. Valuation Smoothing (for Non-Traded BDCs)

Like Non-Traded REITs, non-traded BDCs don’t reprice daily.
This reduces volatility but may lag real-time conditions.

3. Leverage (Borrowing)

BDCs often borrow money to enhance returns.
This can magnify gains but can also magnify losses.

4. Liquidity

Non-traded BDCs, like Non-Traded REITs, may have quarterly redemption limits and are not designed for short-term investors.

BDCs are designed for investors who want:

high income potential
private credit exposure
diversification beyond public bonds
a long-term allocation

They are especially common in income-focused portfolios and as a complement to bond or fixed-income strategies.