What is a Business Development Company?
Investing in small companies, mid-sized companies, and distressed companies, a business development company (BDC) helps new companies grow during the initial development stage. It helps distressed companies get back on their feet. The majority of BDCs are public companies. Their shares can be found on the big exchanges.
Run similarly to non-traded real estate investment trusts (REITs), BDCs will pool investors’ money and use that cash as capital to invest in other businesses. Most BDCs invest in private companies and also smaller, public ones with low trading volumes. They give these businesses permanent capital through debt, equity, and/or hybrid financial instruments.
While most business development companies are public, there are also non-traded BDCs, which are also known as private BDCs. Although they aren’t exposed to the volatility that can arise when trading on public markets, non-traded BDCs tend to come with high-net-worth requirements for REIT investors. They may ask for higher initial investments.
Non-traded BDCs are illiquid, charge higher commissions and fees, may have redemption limits, and are more suitable for those with long-term investment time horizons.
BDC investors look to make money from the dividends on their investments or the sale of their shares. Because business development companies use leverage and invest in distressed companies, they can be high risk. Although retail investors can invest in many business development companies, this doesn’t mean that all of them should.
Our broker misconduct attorneys at Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com) represent REIT investors who suffered losses in BDCs.
We fight for our clients in Financial Industry Regulatory Authority (FINRA) arbitration to help them recover their money from the brokerage firms and financial advisors that caused them financial harm.Four of the BDCs That SSEK Law Firm is Investigating
- Business Development Corp. of America (BDCA): This company first offered shares to investors in 2011, raising $1.9M. Its focus has been on providing middle-market companies with senior secured loans. BDCA’s shares have since dropped dramatically by over 50% in price.
- CION investment Corp.: This publicly-traded BDC also mostly provides senior secured loans to middle-market companies. Investors have seen an over 40% drop in share price. It is believed that only 88% of investors’ funds actually were directed toward making investments. About 10% of their money went to paying broker commissions and dealer management fees.
- FS Energy and Power Fund
- Sierra Income Corp.
- Business development companies give investors an opportunity to gain exposure to debt and equity investments in companies that are predominantly private.
- For the BDCs that trade on public exchanges, they tend to have liquidity and offer transparency.
- A business development company’s investment can provide diversification to an investor’s portfolio along with exposure to securities beyond stocks and bonds.
- BDCs can provide high dividend yields. Investors’ taxes on them will usually be the same rate as what they would pay for ordinary income.
- Even though most BDCs are liquid, their holdings might not be. Illiquid securities that are included among those holdings may lead to unexpected, sudden losses. Because BDCs often use leverage, this can cause cash flow problems if there is a decline in the value of the assets that were leveraged.
- Because business development companies usually invest in companies that are in trouble or those with no track record because they are so new, there is the risk of default or failure.
- Rising interest rates can harm a BDC’s profit margin and mean less returns for REIT investors.
At SSEK Law Firm our experienced BDC investment fraud attorneys represent investors who were unsuitably recommended and sold shares in a business development company that were too risky for them or whose broker overconcentrated their portfolio with this investment.
Because high commissions often come with selling BDCs, a financial advisor may have forgotten to act in a customer’s best interests, causing them to suffer significant losses.