Don't Invest In BDCs Without Reading This First...
If Frankenstein author Mary Shelley had been anfanatic, she might've liked the idea of the : Fashion a company out of parts of other companies, then set the creation loose by taking it public.
Of course, society doesn't shun theas it did Victor von Frankenstein's monster, nor has Mel Brooks made a comedic movie about the (though that would be cool). In fact, BDCs can be gentle giants.
But before you invest in one, it's best to understand a few key, lest you wake one night to a financial monster staring back at you.
First things first: What is a public offering to invest (typically) in small- or medium-size private companies... but it can't invest in just any company.? It's basically a private or firm that goes public. It uses the proceeds of the
The goal is to invest in new companies and provide BDC must control the issuers it invests in or it must provide "significant managerial assistance" (which could include holding board or simply providing consulting ). This often means that entrepreneurs and managers give up some control over their businesses.. As such, a
Similar to due diligence on ., BDCs usually trade on one of the major U.S. exchanges. However, unlike regular , they represent a share of a specialized portfolio managed by a group of concentrating on a specific industry, country or sector. Deciding which companies to invest in requires reviewing hundreds of business plans, meeting company managers and performing extensive
The taxable income to shareholders every .Company Act of 1940 and the SEC regulate BDCs; they got a boost after the passage of the Small Business Incentive Act in 1980. These regulations cover everything from what the BDC can invest in to who can be on the board. Most BDCs have Regulated Company (RIC) status, which means they generally must distribute at least 90% of their
This RIC status also requires BDCs to stay diversified: They usually can't issuer's voting securities; and they usually can't more than a quarter of their assets into businesses that they control or businesses that are in the same industry. (Note: This does not apply to in U.S. government securities or other registered companies.)more than 5% of their assets in any single security (and we're not just talking about securities); they usually can't buy more than 10% of any
A BDC is a investment managers of a BDC operate according to an advisory agreement and receive a fee every -- typically 2% of the BDC's assets, but it varies. They also receive a performance fee that depends on the amount of interest , and the BDC earns.and has a . The
Venture Capital and Private
BDCs are similar to venture capital (VC) or private capital markets. However, VC and PE are often only to , sophisticated investors, as well as banks, endowments, pension , insurance companies, various financial institutions and other corporations. BDCs allow regular investors a way in.(PE) in that they provide investors with a way to invest in small, private or other hard-to-access companies that typically have less access to
BDCs also liquidate the BDC's in the underlying companies; they can simply sell their in the . This feature often attracts quickly to new BDCs, making BDCs an often faster way to raise private and venture capital for small and medium-sized companies.more than VC and PE . Investors no longer have to wait for the managers to
In general, BDC capital and ensure that their employees are properly licensed as well.managers must be registered investment advisors with the SEC. Registered investment advisors provide advice about for a fee and are required by most states to register or become licensed. This usually involves passing the Series 63, 65 and/or 66 tests administered by FINRA. Registered investment advisors must make regular filings to state and federal agencies, pay processing fees, maintain minimum net
One of the most important parts of BDC liquidity event," the exit takes place anywhere from three to 10 years after the initial , often via an initial public offering of the underlying company or through the or of the underlying company.is the "exit" -- the plans for selling an in a company. Also known as the "harvest" or "
Though this is the stage at which shareholders hopefully make a money -- and it is tempting to malign this influx of profit as "vulture-like behavior" -- it is important to realize that BDCs provide important and necessary . They foster entrepreneurship, help struggling companies get badly needed to turn themselves around, and even provide managerial expertise to give those turnarounds the best chance they can.of
This, of course, is not without tremendous risk. Many companies fail or underperform, which is why BDCs diversify their . Nonetheless, BDC investors must be willing to take significant long-term risks for what can be very high returns.
TheAnswer: Business Development Companies are public corporations that invest in other companies. They are subject to significant regulations that can affect what you, the investor, receive in dividends and returns, and they sometimes take on some considerable risks when they invest in companies that are young, small, private, struggling or developing. With risk comes opportunity, of course.
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