Investors are finding attractive yields by investing in Business Development Companies (BDCs).

From Investing.com: 2024-10-05 06:00:45

BDCs have seen significant growth, with total assets under management increasing from $12 billion in 2000 to over $260 billion by 2023, per a recent Jefferies report. The investment company invests in middle-market industry, focusing on small private companies generating $5 million to $100 million EBITDA. They primarily provide debt funding through senior secured loans but can also invest in equity capital.

BDCs, created in the 1980s due to banks tightening lending standards, offer investors high dividend income ranging from high-single digits to mid-teens. Returns are generated through leverage, which amplifies yields, and fees charged to borrowers that contribute significantly. Some BDCs are publicly traded, offering investors liquidity and access to underlying assets for income.

Investors need to carefully consider risks when investing in BDCs. Credit risk must be managed as BDCs invest in various companies across different sectors. BDCs like Horizon Technology Finance invest in development-stage companies with higher risk but potential higher returns. Understanding valuations for publicly traded BDCs is important, especially with market fluctuations and SEC reporting requirements.

Investors need to understand how lower interest rates and potential recession could impact BDCs. While lower rates could affect dividend income, lowering borrowing costs could help cushion the impact on margins. Individual BDCs should be reviewed to understand their underlying assets and performance during different economic cycles.

Deal origination is crucial for BDCs to source quality investments and stay competitive. A long-standing management team is essential for successfully origination opportunities. Due diligence is key for investors looking at BDCs, focusing on the management team, dividend yield, and income generation capabilities of the BDC, among other factors.



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