Business Development Corperation Information

(BDC Corp)

What are BDCs:
Business development company (BDC) is a class of public companies that must invest in small, upcoming businesses. Think of them like a publicly traded venture capital firm (VC). BDCs can invest into these smaller, companies in many ways often as debt, equity and often a hybered type of synthesis of the two.  BDCs also loan money to small enterprises and offer consulting for a fee.  The point is for them to attach and suport to neophite companies, add capital and expertise.  Hense the name business development corperation.

As BDCs are public investors like you and me can buy shares on the open market and participate in the formerly difficult to access world of venture capital.  Also being publicly traded on an exchange you have liquity.  Often VC firms have provisions that limit withdrawls.

How a BDC works:
When looking for prospective small business as an investment, a BDC's goal is to invest in and provide guidance, personal and conections.  As such, a BDC looks for a business where it can exert significant control over the company's direction  where it will attach new senior managment and board seats.  It will seek to restructure the firm to boost sales and cut costs.

Most BDCs have regulated investment company (RIC) status, which means they must distribute at least 90% of their taxable income to shareholders every year, similar to a REIT. This RIC status also requires BDCs to stay diversified: they can't put more than 5% of their assets in any single security, they can't buy more than 10% of any issuer's voting securities, and they can't put more than a quarter of their assets into businesses that they control or businesses that are in the same industry. This does not apply to investments in U.S. government securities or other registered investment companies.

Why you should conciter BDCs:
BDCs are similar to venture capital (VC) or private equity (PE) funds. They provide exposure to small businesses with potential explosive upside.  An average investor usualy locked out from investing in high yield VCs and PEs.  One must be an accredited investor or have a liquid net worth of over a million US Dollars

However, VC and PE funds are often closed to all but wealthy investors. BDCs on the other hand, allow anyone who purchases a share to participate in this market.

BDCs also offer more liquidity than VC and PE funds. Investors no longer have to wait for the investment managers to liquidate the BDC's investments in the underlying companies; they can simply sell their shares in the open market. This feature often attracts money to newly public BDCs, thereby giving them a faster way to raise capital for investments.

Business Development Company History

Congress enacted the Small Business Investment Incentive Act in 1980 which created the structure for Business Development Companies (“BDC”) from the initial provisions of the Investment Company Act of 1940.

A BDC as closed end mutual funds designed to create investment in the stock of private owned portfolio companies and undervalued public portfolio companies. A portfolio company is one in which the BDC has invested time and money in addition to facilitating investment from other related and independent sources. This investment in the portfolio company could be equity, convertible debt for bridge loans and hybrid like preferred stock to assist the growth of a client portfolio company. Congress also required that substantial management support be offered by the BDC on a fair fee basis to a portfolio company in which the BDC has facilitated investment. This support is intended to increase the investment return and mitigate the risk to investors. This in turn should provide the portfolio company with maximum opportunities for capital with reasonable terms.

Incentive for Business Development Company Performance

Investment of time, money and other resources by the BDC in a Portfolio Company is made to increase the amount and certainty of the return on the BDC and other investor capital.

Investors in a portfolio company including the BDC expect the management of a portfolio company to grow their business and then spin-out their company from the BDC as a successful public company. Some of the portfolio company shares held by the BDC are dividend out to the BDC shareholders by the BDC. The shares retained by the BDC as a registered mutual fund are used to build the value and expand the capabilities of the BDC to invest further.

The BDC may retain from 10% to 50% of the shares acquired from a portfolio companies as part of its stock portfolio. Multiple investments by the BDC in different portfolio companies will provide diversification for the investors.

The amount of ownership acquired in any portfolio company by the BDC can vary from a minority interest of 10% to total acquisition of 100% of the portfolio company. However, it is expected that a minority interest will be more typical.

Bridge loan capital advances will be provided on a staged basis to match the need and the ability of the portfolio Company to manage new investment.

The BDC will continue to mentor the portfolio company throughout the investment period and assist in the achievement of both business and financial goals