What is a business development company (BDC)?

A business development company (BDC) is fundamentally a closed-end investment company that primarily invests in the equity and debt of private companies, typically those that are in the early stages of development or require capital to grow. BDCs are designed to provide capital to small and medium-sized businesses, which may have difficulty accessing traditional financial avenues such as bank loans or public equity markets.

The structure of a BDC allows it to operate like a publicly traded company while focusing on acquiring and managing investments in non-public entities. This is particularly advantageous as it offers individual investors an opportunity to participate in private equity-type investments through a publicly traded vehicle. In addition, BDCs are required by law to distribute at least 90 percent of their taxable income as dividends, which can provide attractive yields for investors.

In contrast, a public mutual fund primarily invests in publicly traded securities, whereas private equity firms typically invest in private companies but do not operate under the same regulatory framework as BDCs, and they often involve significant leveraging of investments. Investment banks focus on underwriting and advisory services, making them distinct from the investment strategy and operational focus of BDCs.