Business Development Capital represent attractive investment alternatives to venture capital funds , which are available mostly to large institutions and wealthy individuals through private placements. Venture capital funds keep a limited number of investors and must meet certain asset-related tests to avoid being classified as regulated investment companies. BDC shares, on the other hand, are typically traded on stock exchanges and are available investments for the public. Less stringent provisions for the amount of borrowing, related-party transactions and equity-based compensation make the BDC an appealing form of incorporation to venture capitalists who were previously unwilling to assume the burdensome regulation of an investment company.
BDCs provide investors with exposure to debt and equity investments in predominantly private companies, which are typically hard to invest in. Because BDC are regulated investment companies, they must distribute over 90% of their profits to shareholders, which results in above-average dividend yields. Also, BDC investments may diversify investors' portfolios with securities that can display substantially different returns from stocks and bonds. However, because most BDC holdings are typically invested in securities, a BDC portfolios have subjective fair value estimates and may take sudden and quick losses.
BDC are usually taxed as regulated investment companies (RIC) under the Internal Revenue Code . Like real estate investment trusts (REITs), as long as the RIC meets certain income, diversity, and distribution requirements, the company pays little or no corporate income tax. As a pass-through tax structure, RICs must distribute at least 90 percent of taxable income as dividends to investors . Most BDCs distribute 98 percent of their taxable income to avoid all corporate taxation. At least two BDCs have stated that they intend to be taxed as a REIT. Because income is not taxed at the corporate level, distributions to investors are generally taxable for investors based on the type of income earned by the BDC. For example, ordinary income to the BDC is taxable for investors at ordinary income rates, while capital gains income to the BDC is generally taxable for investors at capital gains rates.
Historically, BDCs are listed on a national stock exchange like the NYSE or NASDAQ . Recently, as is common for REITs, some BDCs have declined listing on an exchange. Unlisted BDCs are required to follow the same regulatory structure as listed BDCs.