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Understanding Business Development Companies

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What is a business development company?

A business development company (“BDC”) is a type of closed-end fund that was created by an amendment to the Investment Company Act of 1940 called the Small Business Investment Incentive Act of 1980. As the name suggests, the structure was created to promote investment in an important part of the U.S. economy, small and middle market businesses. Comprised of more than 200,000 companies generating over $10 trillion in annual revenue1, the middle market is a driving force of the U.S. economy.

Most BDCs are organized as Regulated Investment Companies (“RICs”), which means they must derive a minimum of 90% of income from capital gains, interest, or dividends earned on investments. BDCs are also required to invest no less than 70% of total assets in private U.S. companies or public U.S. companies with market capitalizations of less than $250 million. Companies that fit this profile typically have fewer options to raise capital to facilitate growth and support daily operations when compared to their larger, public counterparts.

The relationship between BDCs, investors, and middle market companies.

Most BDCs provide financing solutions to middle market businesses by raising money from individual and institutional investors and deploying it in the form of senior secured, floating rate loans. Interest payments on these loans are paid to the fund, which is then required to distribute at least 90% of its taxable income back to its investors.

As RICs, BDC dividend payments are not subject to entity-level tax on distributed income. This flow through treatment creates tax efficiency by avoiding the possibility of double taxation of shareholders, provided the fund meets periodic asset, income, and distribution requirements.

What are the different types of business development companies?

BDCs typically fall under one of three categories: Private Placement, Non-traded, and Public. BDCs can be offered in different ways and their investment strategies can vary significantly.

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Private placement BDC Non-traded BDC Public BDC
Cell label Offering type Cell label  Private placement Cell label Continuous offering, up to a stated limit Traditional IPO
Cell label Can offer multiple share classes Cell label No Cell label Yes Cell label No
Cell label Liquidity Cell label Typically, none while private; Liquidity event when portfolio is listed or wound down Cell label Typically, periodic share repurchases Cell label Exchange-traded

How can BDCs benefit investors?

BDCs present several potential benefits for investors, including:

  • Access: BDCs provide individual investors with access to private assets and investment strategies more commonly associated with the institutional investment space. Non-traded BDCs may also offer multiple share classes, providing further flexibility.
  • Income & return potential: BDC portfolios have the potential to generate attractive returns due to the yield premium associated with private, less-liquid assets. Net investment income is distributed to shareholders in the form of regular distributions.
  • Downside management: BDC managers typically structure investments as senior-secured loans. Senior-secured loans are collateralized by a borrowing company’s assets and have the highest payment priority in the event of a default.
  • Liquidity: The BDC structure typically offers investors periodic liquidity opportunities while taking advantage of the potential benefits of investing in less-liquid asset classes.
  • Diversification: The underlying assets that BDCs invest in are usually not traded on public exchanges which may reduce exposure of an investor’s portfolio to publicly traded markets.
  • Transparency & simplicity: Public filings disclose the makeup of BDC portfolios and their valuations at regular intervals, providing shareholders a level of transparency not commonly associated with private investment opportunities. The pass-through nature of BDC income means shareholders receive more efficient tax treatment, receiving form 1099s instead of schedule K-1s.

What are the risks of BDCs?

As with any investment, there are certain risks and trade-offs associated with BDCs and the underlying assets they contain.

Publicly traded BDCs, for example, have exposure to the volatility risk of public markets but offer daily liquidity; while non-traded BDCs are considered less liquid but can offer illiquidity premiums. BDCs may contain equity or debt investments but are usually associated with the latter in the form of leveraged loans. Credit risk is the risk of nonpayment of scheduled interest or principal payments on a debt investment. Should a borrower fail to make a payment, or default, this may affect the overall return to the portfolio. Although fees vary from one BDC to the next, they may involve substantial costs. Anyone considering an investment in BDCs should thoroughly review the corresponding offering documents for information regarding risks, fees and expenses.

Past performance is not a guarantee of future results. The views and opinions expressed herein are those of Blue Owl and are subject to change as markets and other conditions fluctuate. Blue Owl is under no obligation to update or keep current the information presented.

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  1. Source: Year-End 2022 Middle Market Indicator, org.

Important information

Past performance is not a guarantee of future results.

The material presented is proprietary information regarding Blue Owl Capital Inc. (“Blue Owl”), its affiliates and investment program, funds sponsored by Blue Owl, including the Blue Owl Credit, GP Strategic Capital Funds and the Real Estate Funds (collectively the “Blue Owl Funds”) as well as investment held by the Blue Owl Funds.

The views expressed and, except as otherwise indicated, the information provided are as of the report date and are subject to change, update, revision, verification, and amendment, materially or otherwise, without notice, as market or other conditions change. Since these conditions can change frequently, there can be no assurance that the trends described herein will continue or that any forecasts are accurate. In addition, certain of the statements contained in this presentation may be statements of future expectations and other forward-looking statements that are based on the current views and assumptions of Blue Owl and involve known and unknown risks and uncertainties (including those discussed below) that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. These statements may be forward-looking by reason of context or identified by words such as “may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential or continue” and other similar expressions. Neither Blue Owl, its affiliates, nor any of Blue Owl’s or its affiliates' respective advisers, members, directors, officers, partners, agents, representatives or employees or any other person (collectively the “Blue Owl Entities”) is under any obligation to update or keep current the information contained in this document.

All investments are subject to risk, including the loss of the principal amount invested. These risks may include limited operating history, uncertain distributions, inconsistent valuation of the portfolio, changing interest rates, leveraging of assets, reliance on the investment advisor, potential conflicts of interest, payment of substantial fees to the investment advisor and the dealer manager, potential illiquidity, and liquidation at more or less than the original amount invested. Diversification will not guarantee profitability or protection against loss. Performance may be volatile, and the NAV may fluctuate.

This presentation is for informational purposes only and is not an offer or a solicitation to sell or subscribe for any fund and does not constitute investment, legal, regulatory, business, tax, financial, accounting, or other advice or a recommendation regarding any securities of Blue Owl, of any fund or vehicle managed by Blue Owl, or of any other issuer of securities. Only a definitive offering document (i.e.: Prospectus or Private Placement Memorandum) can make such an offer.

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