A Business Development Company (BDC) is a type of closed-end investment fund registered under the Investment Company Act of 1940 that primarily invests in the debt and equity of private companies. BDCs were created by Congress in 1980 to channel capital to small and medium-sized businesses that lack access to public capital markets. They offer retail and institutional investors a regulated, liquid vehicle to participate in private credit returns.
BDCs are required to distribute at least 90% of their taxable income to shareholders each year to qualify for pass-through tax treatment (RIC status) — similar to REITs in the real estate sector. This high distribution requirement means BDCs retain little capital for growth and must regularly access equity and debt capital markets to fund portfolio expansion.
Most BDC portfolios consist predominantly of floating-rate senior secured loans — similar to what a direct lending fund holds — though many BDCs also have meaningful exposure to second-lien loans, subordinated notes, preferred equity, and common equity (often received as warrants or co-investments alongside debt). The floating-rate nature of most BDC assets means BDC income tends to rise with interest rates, though credit quality concerns can offset this in late-cycle environments.
BDCs use leverage — borrowing through credit facilities, baby bonds, and notes — to enhance returns on equity. The regulatory leverage limit for BDCs was increased from 1:1 to 2:1 (debt-to-equity) in 2018 under the Small Business Credit Availability Act, allowing BDCs to hold more assets per dollar of equity. Higher leverage amplifies both returns and risks.
Publicly traded BDCs often trade at premiums or discounts to net asset value (NAV) — the book value of assets minus liabilities per share. BDCs trading above NAV can issue equity accretively; those trading below NAV face higher dilution from equity raises. The BDC market includes both publicly traded vehicles (listed on NYSE or Nasdaq) and non-traded BDCs distributed through financial advisors to retail investors.