Investors seeking exposure to a diversified portfolio of high-yielding assets may want to consider a relatively new investment vehicle: the business development company (BDC).
BDCs are similar to exchange-traded funds (ETFs) in that they are publicly traded investment funds that hold a basket of assets, but instead of stocks, BDCs hold a mix of loans, debt securities, and equity investments in private, often small and medium-sized businesses.
What sets BDCs apart from other investment vehicles is their mandate to invest in small and mid-sized businesses that are typically ignored by traditional lenders. BDCs offer a way for retail investors to invest in companies that would otherwise be difficult or impossible to access, while providing capital to support these businesses’ growth.
BDCs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. This means that BDCs can offer high yields, with some currently paying out dividends in excess of 8%.
Exploring the Benefits
Investing in a BDC is similar to investing in an ETF. Shares are traded on major exchanges, making them easy to buy and sell, and the underlying assets are diversified to reduce risk. BDCs may also offer the potential for capital appreciation as the underlying companies grow and succeed.
Of course, as with any investment, there are risks to consider. BDCs may invest in riskier, less-established companies, which could lead to higher default rates and loss of capital. Additionally, BDCs are subject to interest rate risk, as rising rates could lower the value of their underlying assets.
Investors should also be aware of the fees associated with BDCs. BDCs may charge management fees, performance fees, and other expenses that can eat into returns. It’s important to research the fees and performance of any BDC before investing.
Overall, BDCs offer an interesting investment opportunity for investors seeking high yields and exposure to private businesses. As with any investment, it’s important to do your research and consider the risks before investing.