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Business Development Companies
1980, the U.S. Congress created a class of corporation called a business
development company (BDC) to encourage the flow of public equity capital to
qualify as a "regulated investment company," a BDC must invest
at least 70% of its assets in private or thinly traded, public U.S.
corporations, and must distribute at least 90% of its taxable income to
shareholders in the form of dividends. BDCs must also make available
significant managerial assistance to their client companies. BDCs often
take an equity interest in their client companies which can result in
capital gains when they liquidate those positions. A business development
company gains an additional
tax advantage if it distributes at least 98% of its ordinary income and
98% of its capital gains to shareholders as dividends.
BDCs make mostly short-term, unsecured
loans in the $2 million to $50 million range. Also, they frequently take
ownership positions (equity interest) in their client companies. Since
they must pay out most of their profits to shareholders, BDCs must raise
cash to fund expansion by selling more shares or via borrowing.
BDCs went through hard times in 2008 and
early 2009 when the economy tumbled. Now, most have recovered, are
financially strong, and well positioned to prosper if the economy
continues to strengthen.