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BDCs - A Primer

August 22, 2013

Blue Vault has formed a strategic alliance with Blue Springs Capital to launch a new report that will  monitor and analyze the performance of nontraded Business Development Companies (BDC). Created for the purpose of providing education and enhanced transparency for the nontraded REIT industry, Blue Vault is expanding the firm’s research of nontraded investment products by offering financial intermediaries' unbiased analysis and standardized BDC performance reporting in a user-friendly format.

Business Development Companies Defined

A business development company (BDC) is an SEC-registered investment company that invests primarily in private U.S.-based businesses. This form of company was created by Congress in 1980 as amendments to the Investment Company Act of 1940.  BDCs are typically taxed as regulated investment companies (RICs). Similar to REITs, BDCs are required to distribute at least 90% of taxable income as dividends to investors, and as a result, the company itself  pays little or no corporate income tax. Although the regulation for BDCs was passed in 1980, the creation of these companies did not come until the late 1990s and early 2000s.

BDCs are required to invest 70% or more of their assets in U.S.-based private companies. This is an investment type that was previously limited to institutional and wealthy individuals through private equity and private debt funds. Now through these funds, who must report their financials to the SEC quarterly, retail investors have access to private equity and debt investments advised by world-renowned investment firms such as Blackstone, KKR, and Apollo.

Historically, BDCs have been traded on public exchanges. Mirroring what happened over two decades ago in the REIT industry, nontraded BDCs have only become available to individual investors within the past few years. The first nontraded BDC, FS Investment Corporation, became effective in January 2009. The second nontraded BDC did not become effective until 2011, when Corporate Capital Trust did so.

Similar to REITs, BDCs can be externally or internally managed. External management is a structure where an advisor makes investments and manages the portfolio on behalf of the BDC. The BDC itself has no employees, but pays a management fee to the advisor. Internal management means the BDC has employees and overhead that are a normal operating expenses to the BDC. Most BDCs in the market today, both traded and nontraded, are externally managed.

To date, the industry consists of over $9.8 billion in total assets and is comprised of 11 companies, 10 of which are currently raising capital and one that is closed to new investments.  During the first half of 2013, nontraded BDCs have raised over $2 billion from investors.

Blue Vault’s first edition of the BDC Review will be released to members the week of September 16, 2013.  Contact Blue Vault for additional information.

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The Blue Vault Summit could not have been more perfectly timed. This gathering of the Broker Dealer and Sponsor communities provided insightful and open discussion from several vantage points. These conversations are paramount, especially in a time of significant regulatory change.

Matthew C. Strife Suitability Manager, The O.N. Equity Sales Company Broker Dealer Educational Summit 2016 April 14, 2016