Business Development Company (BDC)

What it is:

Business development company (BDC) is a designation specific to public firms that invest in small, upcoming businesses. BDCs hope their stakes in the businesses will increase in value as the business grows. BDCs also loan money to small enterprises and offer consulting for a fee.

How it works/Example:

What makes them unique is that investors can buy shares of BDCs on the open market and participate in the formerly difficult to access world of venture capital.

When looking for prospective small business, a BDC does not invest in just any company -- its goal is to invest in and provide guidance to those that will one day grow large. As such, a BDC also looks for a business where it can exert significant control over the company's direction (which could include holding board seats or simply providing consulting guidance).

Most BDCs have regulated investment company (RIC) status, which means they must distribute at least 90% of their taxable income to shareholders every year. 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 it Matters:

BDCs are similar to venture capital (VC) or private equity (PE) funds since they provide investors with a way to invest in small companies and participate in the sale of those investments. 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.

To see our list of BDCs and the high yields offered by some, read 21 Business Development Companies With Sky-High Yields

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