I first heard about Business Development Companies, or BDCs, in David Einhorn’s book Fooling Some of the People All of the Time.
Our old family business, Flight Display Systems, is now controlled by a BDC (Fidus Investment Corp).
BDCs seem like an interesting area to learn more about investing and debt. I’ll post some of my notes here on this page.
Previously I wrote about:
- Is a Correction Near? My Current Stock Market Investing Thesis
- What I Learned About Inflation at London’s Bank of England Museum
Disclaimer: Don’t listen to me for investment advice! I have no idea what I’m doing (proof).
These are the best resources I’ve found for researching more about BDCs:
- Business Development Company Universe, a very large list of publicly-traded BDCs.
- Investopedia’s page about BDCs, with helpful definitions.
- PDF: The ABC of BDCs and Closed-End Funds, from the Active Investment Company Alliance.
2020-05-22 latest update: I started this list of questions I have about BDCs.
What is a BDC?
Definition — a business development company (BDC) is:
- “a type of closed-end fund that makes investments in developing and financially distressed firms.”
- “a closed-end fund that provides small, growing companies access to capital.”
- “an organization that invests in small- and medium-sized companies as well as distressed companies.”
via Investopedia: MUTUAL FUND ESSENTIALS – Business Development Company (BDC)
There are around 45 publicly-traded BDCs. As one of them says: “Business development companies provide businesses with capital, and in turn, give people access to investments that were once exclusive to the wealthy….” via Saratoga Investment Corp: About BDCs
How Do BDCs Work?
They’re sort of like REITs, but for debt on smaller companies. BDCs have to follow a bunch of rules, such as:
- Must invest in private or public U.S. firms with market values of less than US$250 million.
- lots more on this page at Investopedia: Business Development Company (BDC)
BDC Stock Tickers and Specific Companies
These are some of the BDCs I have heard about:
- $GDBC – Golub Capital BDC
- $ARES – Ares Management
- $FDUS – Fidus Investment Corporation
- $CMFN – CM Finance Inc
See here for a larger list. from Closed-End Fund Advisors.
Questions I Have About BDCs
Note: I have a lot of questions! As I’ve continued to research BDCs, I keep getting more confused (this is due to my general lack of knowledge about financial matters). I’ve created a Google Doc here to list my open questions. Please feel free to edit it and add some answers or your own questions.
How is Private Equity Involved?
Are there many private equity people searching to buy companies that BDCs control?
Related article by Kelsey Butler from June 2019: Why Private Equity’s Biggest Names Are Getting Into a Small-Loan Backwater
In the loan origination stage, private equity firms can team up with BDCs to get money (loans) to purchase companies. BDCs help private equity to finance their investments and avoid dealing with banks which might not make loans.
Recent News Articles on BDCs
- 2020-05-21 Refinitiv LPC: 1Q20 BDC Earnings Review
- 2020-05-18 Bloomberg: For Private Debt’s BDCs, the Worst May Be Yet to Come This Year
- 2020-04-16 Reuters: Dividend cuts loom over BDC market as pandemic extends
- 2020-04-13 Bloomberg: These Firms Borrowed to Lend to Indebted Companies. It’s Going Badly
- 2019-06-11 Bloomberg: Why Private Equity’s Biggest Names Are Getting Into a Small-Loan Backwater
Research on BDCs
Several companies provide proprietary data on business development companies and/or middle market loans. Here are a few that people have referred me to:
- S&P Global: Leveraged Commentary and Data (offers a free trial)
- AdvantageData: Business Development Companies (BDC)
BDC People on Twitter
- PIK, or PIK interest: TBD, but I think this is what happens when a BDC stops paying / becomes non-performing. Instead of interest payments, perhaps they pay equity?
Companies in the BDC Space
- Virtus Herzfeld Fund, a mutual fund that specializes in closed-end funds run by Erik M. Herzfeld. I’m not sure how active they are w/BDCs.
- Active Investment Co. Alliance is a 501(c)(6) non-profit trade association for listed closed-end funds and business development companies.
- Lincoln International has a proprietary middle market database, plus a large staff focused on this.
To be continued! I’m still exploring and researching.
2020-05-08 page created, outline, initial companies
2020-05-21 added Bloomberg link, ToC, Twitter links, lots of news links
2020-05-21 removed reference to REITs, thanks to Josh Clarkson!
2020-05-22 I started this list of questions I have about BDCs. Added link to Refinitiv LPC video.
2020-05-24 Added link to Lincoln International’s 1Q20 key takeaways report, thanks @Lazarbeam9
2020-05-24 Added links to research, removed links to Glassdoor reviews, linked to Saratoga’s page on BDCs
BONUS — On April 14, 2020, Howard Marks called it a “regulatory wonderland” with the Fed telling BDCs that they can value their loans at December 31st prices: (source)
(The Fed) gave regulatory relief to business developments companies, or BDCs, which buy or make loans to mid-size businesses. In order to help them avoid tripping limits on their activities, the Fed said they can value the loans on their books at December 31 prices. “The SEC is primarily trying to address the issue that a temporary markdown in the fair value of BDC portfolio companies could increase leverage above the regulatory maximum, thus limiting further lending by a BDC. As such, the SEC is allowing BDCs to use an adjusted portfolio value when calculating their asset coverage (leverage) ratio.” (Keefe, Bruyette & Woods on April 9th) In other words, we’re in a regulatory wonderland where there’s no pretense that financial statements have to be accurate or current.
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