How do you analyze a BDC?

How do you analyze a BDC?

Tangible book value growth is the best way to gauge a BDC’s performance, from a shareholder value perspective. Shareholders equity is assets minus liabilities. Book value is shareholders equity expressed on a per-share basis.

Why are BDCs selling off?

BDCs are constantly selling equity to grow their assets, because they are legally limited to a debt-to-equity ratio of 2:1. If a BDC is trading below its NAV per share, then every share sold destroys shareholder value because, as we saw with our Full Circle Capital example, it is selling $1 in assets for $0.75.

How does a BDC make money?

Most BDCs make money investing in companies via debt financing (buying bonds and providing loans) to a company. If they hold stock in the companies they invest in, the BDCs profit if the stock price (or net asset value) increases. BDCs also make money by investing in senior secured bonds and loans.

How are BDCs taxed?

As Regulated Investment Companies, BDCs aren’t considered taxable entities. In exchange for this favorable tax treatment, however, a BDC must distribute at least 90\% of its taxable income to shareholders as ordinary dividends each year. Since they retain very little of their earnings, BDCs don’t pay corporate taxes.

Are BDCs safe?

The debt securities that generally make up a BDC’s investment portfolio are relatively illiquid and tend to have high credit risk, or the risk of default, leading to increased volatility and a greater likelihood of large price declines during a market downturn.

Can BDCs invest in equity?

Business Development Companies (BDCs) are a special type of investment that combines attributes of publicly traded companies and closed-end investment vehicles, giving investors exposure to private equity- or venture capital-like investments. An example of investing in equity would be preferred stock or common stock.

Do BDC pay qualified dividends?

Non-Qualified Dividends Dividends paid by tax-exempt corporations or trusts such as Business Development Corporations (BDCs), Master Limited Partnerships (MLPs), Limited Liability Corporations (LLCs), or Real Estate Investment Trusts (REITs) are considered non-qualified, and may be taxed at ordinary rates.

Who would be most likely to invest in a BDC?

The BDC must invest at least 70\% of its assets in private or public U.S. firms with market values of less than US$250 million. These companies are often young businesses, seeking financing, or firms that are suffering or emerging from financial difficulties.

Do BDCs pay qualified dividends?

Can anyone invest in a BDC?

Many BDCs are publicly traded and are open to retail investors. BDCs offer investors high dividend yields and some capital appreciation potential. BDCs heavy use of leverage and targeting of small or distressed companies makes them relatively high-risk investments.

What is a business development company (BDC)?

Business Development Companies are closed-end investment firms. Their business model involves making debt and/or equity investments in other companies, typically small or mid-size businesses. These target companies may not have access to traditional means of raising capital, which makes them suitable partners for a BDC.

How many BDCs can a company have?

Some companies may offer two or more BDCs, one BDC for investing in their debt and another BDC for investing in their equity. BDCs may be registered as Regulated Investment Companies (RIC), potentially giving investors a tax advantage.

What makes a target company suitable for a BDC?

These target companies may not have access to traditional means of raising capital, which makes them suitable partners for a BDC. BDCs invest in a variety of companies, including turnarounds, developing, or distressed companies. BDCs are registered under the Investment Company Act of 1940.

Should you invest in a business development company?

Business development companies are attractive choices because almost anyone can invest in them. That’s because they are public companies, traded on major stock exchanges. Venture capital and private equity are only available to accredited investors with large net worths.