Business development company (BDC)

A business development company (BDC) is a type of closed-end investment company that pools investor money to finance small and mid-sized businesses — typically private companies or struggling firms that cannot easily raise money through traditional channels. Congress created the BDC structure in 1980 through an amendment to the Investment Company Act of 1940 to funnel capital toward developing American businesses.

BDCs raise capital by selling shares, then deploy that money as loans to or equity stakes in their portfolio companies. Most BDC shares trade on stock exchanges, so investors can buy and sell them as easily as common stock. In addition to providing financing, BDCs must offer significant managerial assistance to the companies they invest in — advice and hands-on support, not just money.

For investors, the appeal is access and income. Private lending and venture-style investing are normally reserved for institutions and wealthy individuals, but a BDC packages those investments into an exchange-traded security anyone can buy. Because most BDCs elect the same pass-through tax treatment as other regulated investment companies — which requires meeting Subchapter M's qualifying-income and diversification tests and, separately, distributing at least 90% of their taxable income — they tend to pay relatively high dividends. The trade-off is risk: portfolio companies are smaller, more leveraged, and more likely to default than established public firms.

The Series 7 exam covers BDCs within its alternative pooled investments material. Know that a BDC is a closed-end company that invests in small and developing businesses, trades on exchanges, provides managerial assistance to portfolio companies, and offers high income potential with elevated credit risk.