Heightened Interest in the Business Development Company Model
The business development company (BDC) model has been gaining popularity. McGladrey's Colin Sanderson discusses what's driving this interest and the trends and obstacles surrounding the current BDC investment market.
In this video interview with Mergers & Acquisitions editor in chief Mary Kathleen Flynn, Colin discusses the evolving BDC market. Read on for a more in-depth Q&A with Colin.
Investors seem to be demonstrating significantly heightened interest in BDCs. What's driving this?
Colin: Some of the most sophisticated and successful investors are already involved in BDCs—such as Apollo Investment Corp.—and many others are looking seriously into this option. Most recently, Oaktree Capital, an $85 billion alternative asset manager, launched its first BDC product. Primary reasons for the increased interest:
Which BDCs have been really successful and what do they have in common?
Colin: Because BDCs are required to pay their income out as dividends to maintain their favorable tax treatment as a regulated investment company, they generally grow through raising capital and aggregation of assets. Some of the largest BDCs are: Ares Capital, American Capital, Apollo Investment Corp. and Prospect Capital. Many of these BDCs are building platforms of funds or business that complement the BDC business.
What trends have you been seeing in the BDC sector?
Colin: During the last two years investors seem to have greater interest in:
Some BDCs have SBIC subsidiaries as a dropdown structure—and many in the registration process appear to have a similar structure in mind—to provide access to low cost funding sources from the Small Business Administration (below a 4 percent rate). An SBIC with $75 in capital can access up to $150 million in leverage from the SBA (up to two licenses)—and with applying for exemptive relief, it does not count toward leverage at the BDC level.
More recently there has been some interest in equity-only BDCs that invest in venture capital and emerging growth companies that will likely qualify under the recently passed JOBS Act, allowing for increased liquidity event opportunities.
What are the common obstacles to starting BDCs and how can you overcome them?
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