Business Development Company
Encyclopedia
A Business Development Company (BDC) is a form of publicly traded private equity
in the United States created by Congress in 1980 as amendments to the Investment Company Act of 1940
. Publicly traded private equity firms may elect regulation as BDCs.
BDCs are usually taxed as regulated investment companies (RIC) under the Internal Revenue Code
. Like real estate investment trust
s (REITs), as long as the RIC meets certain income, diversity, and distribution requirements, the company pays little or no corporate income tax. As a pass-through tax structure, RICs must distribute at least 90 percent of taxable income as dividends to investor
s. Most BDCs distribute 98 percent of their taxable income to avoid all corporate taxation. (RICs fall under section 851 of the Internal Revenue Code
; REITS fall under section 856.)
Because income is not taxed at the corporate level, distributions to investors are generally taxable for investors based on the type of income earned by the BDC. For example, ordinary income to the BDC is taxable for investors at ordinary income rates, while capital gains income to the BDC is generally taxable for investors at capital gains rates.
Historically, BDCs are listed on a national stock exchange like the NYSE or NASDAQ
. Recently, as is common for REITs, some BDCs have declined listing on an exchange. Unlisted BDCs are required to follow the same regulatory structure as listed BDCs, but they must also follow certain distribution requirements as set forth by the Financial Industry Regulatory Authority
(FINRA). FINRA.
Publicly traded private equity
Publicly traded private equity refers to an investment firm or investment vehicle, which makes investments conforming to one of the various private equity strategies, and is listed on a public stock exchange.There are fundamentally two separate opportunities that private equity firms...
in the United States created by Congress in 1980 as amendments to the Investment Company Act of 1940
Investment Company Act of 1940
The Investment Company Act of 1940 is an act of Congress. It was passed as a United States Public Law on August 22, 1940, and is codified at through . Along with the Securities Exchange Act of 1934 and Investment Advisers Act of 1940, and extensive rules issued by the Securities and Exchange...
. Publicly traded private equity firms may elect regulation as BDCs.
Regulation and tax structure
Election means the BDC must subject itself to all relevant provisions of the Investment Company Act, which (a) limits how much debt a BDC may incur, (b) prohibits certain types of affiliated transactions, (c) requires a code of ethics and a comprehensive compliance program, and (d) requires regulation by the Securities and Exchange Commission (SEC) and subject to regular examination, like all mutual funds and closed-end funds. BDCs are also required to file quarterly reports, annual reports, and proxy statements with the SEC.BDCs are usually taxed as regulated investment companies (RIC) under the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
. Like real estate investment trust
Real estate investment trust
A real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors...
s (REITs), as long as the RIC meets certain income, diversity, and distribution requirements, the company pays little or no corporate income tax. As a pass-through tax structure, RICs must distribute at least 90 percent of taxable income as dividends to investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s. Most BDCs distribute 98 percent of their taxable income to avoid all corporate taxation. (RICs fall under section 851 of the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
; REITS fall under section 856.)
Because income is not taxed at the corporate level, distributions to investors are generally taxable for investors based on the type of income earned by the BDC. For example, ordinary income to the BDC is taxable for investors at ordinary income rates, while capital gains income to the BDC is generally taxable for investors at capital gains rates.
Historically, BDCs are listed on a national stock exchange like the NYSE or NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
. Recently, as is common for REITs, some BDCs have declined listing on an exchange. Unlisted BDCs are required to follow the same regulatory structure as listed BDCs, but they must also follow certain distribution requirements as set forth by the Financial Industry Regulatory Authority
Financial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(FINRA). FINRA.
Larger BDCs
Among the largest BDCs by market value, are (in alphabetical order):- American Capital StrategiesAmerican Capital StrategiesAmerican Capital is an alternative asset management company based in Bethesda, Maryland. Founded in 1986 and publicly traded since 1997, American Capital is the largest U.S. publicly traded private equity fund and one of the largest publicly traded alternative asset managers...
- Apollo Investment Corp.
- Ares Capital Corp.
- BlackRockBlackRockBlackRock, Inc. is an American multinational investment management corporation and the world's largest asset manager. BlackRock is headquartered in Manhattan, New York City, New York, United States and is the leading provider of investment, advisory, and risk management solutions...
KelsoKelso & CompanyKelso & Company is a private equity investment firm focusing on leveraged buyouts, recapitalizations and growth capital transactions. Kelso invests in a variety of sectors, including communication, manufacturing and restaurants....
Capital Corp - Fifth Street Finance Corp
- Gladstone Investment Corp
- Hercules Technology Growth Capital
- Kohlberg Capital CorpKohlberg & CompanyKohlberg & Company is a private equity firm that focuses on leveraged buyout transactions founded by industry pioneer Jerome Kohlberg, Jr.Today, the firm invests in a variety of transactions including leveraged carveouts , take private transactions and acquisitions of privately held companies...
- PennantPark Investment Corp
- Prospect Capital Corp
See also
- Private equityPrivate equityPrivate equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
- Publicly traded private equityPublicly traded private equityPublicly traded private equity refers to an investment firm or investment vehicle, which makes investments conforming to one of the various private equity strategies, and is listed on a public stock exchange.There are fundamentally two separate opportunities that private equity firms...
- History of private equity and venture capitalHistory of private equity and venture capitalThe history of private equity and venture capital and the development of these asset classes has occurred through a series of boom and bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital...
- Venture Capital TrustVenture Capital TrustA venture capital trust or VCT is a highly tax efficient UK closed-end collective investment scheme designed to provide private equity capital for small expanding companies and capital gains for investors...
External links
- Understanding high-yield BDCs
- Introduction to BDCs for small investors
- BDC Reporter for BDC news and tracking information
- Financial Industry Regulatory Authority