ROBERT STEPLEMAN: Business Development Companies: What’s the attraction?

One of the more obscure class of investment securities is “Business Development Companies.” They are well-known for their large distributions and their high risks. However, in an environment where “safe” fixed income investments yield perhaps 2%-3%, should investors consider them? Some investors may believe the risks are justified since some well-diversified bond funds have lost 8% of their principal in 2022.

BDCs were created by Congress in 1980 to stimulate investment in middle-market U.S. companies. Those are companies that have earnings before interest, taxes depreciation and amortization of about $10 million to $50 million. BDCs are traded on stock exchanges, and they can pass through investment income without paying corporate income taxes; the investor pays any required taxes. BDCs are required to invest at least 70% of assets in the non-public debt and equity of U.S. companies and annually distribute at least 90% of their income to stockholders.