Private Debt

CHAPTER 12Business Development Companies

There are two primary vehicles through which direct lending managers offer corporate direct lending to investors, business development companies (BDCs) and private funds. This chapter covers BDCs, a rapidly growing investment vehicle but one still relatively unknown to the broader investing public. The second is the private partnership, a vehicle very familiar to investors in real estate and private equity. BDCs are addressed first because corporate direct lending to some extent had its start with this vehicle and because BDCs are currently undergoing significant positive changes that may make them a preferred vehicle in the future.

WHAT IS A BDC?

While differences exist, business development companies (BDCs) are in many ways like real estate investment trusts (REITs) for real estate, and master limited partnerships (MLPs) for energy assets in their cash generating, tax‐preference investment characteristics that appeal to investors. BDCs were created by Congress in 1980, under Section 54 of the Investment Company Act of 1940, to stimulate private investment in middle market US companies, which had suffered during the stagflation period following the steep 1973–1974 recession. Congress gave the BDC the advantage of electing to be private or exchange‐traded with a tax‐free pass‐through of investment income, but with some restrictions, including:

• SEC registration and oversight.
• At least 70% of assets invested in non‐public debt and ...