CHICAGO, May 17 (Reuters) – In a frantic search for yields,
investors often turn toward relatively unknown products.
Business Development Companies (BDCs) are one of latest vehicles
to grab investor attention – and money.
BDCs are companies that lend to young, thinly traded and
often distressed companies that have credit ratings in the
“junk” status. They are as close to a private equity enterprise
as you’re going to get in a public company. Yet their high
yields come at a price in terms of elevated risk that should not
be underestimated, and investors must proceed with caution.
Like Real Estate Investment Trusts (REITs), BDCs must pass
through at least 90 percent of their profit to shareholders.
Most of their borrowers carry the lowest-possible credit ratings
such as BBB-, or are not rated at all. They hold a variety of
companies in their portfolios, so some are more diversified than
As high-yield vehicles, BDCs have been emerging at a
relatively rapid clip in recent years. There were just four of
them nine years ago. Now, there are nearly 30, with a total
market capitalization of $26 billion, according to Financial
Advisor, a trade magazine. That’s peanuts compared with
megabanks like JPM Morgan Chase & Co or Bank of America
Corp, but they are a growing force in corporate finance.
While regulated, BDCs occupy a useful niche in helping
companies grow. Since they can borrow at record-low rates and
make money on the spread – the above-market rates they charge
less credit-worthy borrowers – BDCs are in a sweet spot now as
the economy continues to rebound. They can provide financing to
a wide range of companies typically eschewed by mainstream
banks. Consider them sub-prime lenders to small- to mid-size