Business Development Company - Explained
What is a Business Development Company?
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Table of ContentsWhat is a Business Development Company?What Qualifies as a Business Development Company?Academic Research on Business Development
What is a Business Development Company?
Small to medium sized companies in the initial development stages receive investments and help to promote their grown by an organization known as a business development company (BDC). Closed-end investment funds as many BDCs are similarly set up, are also known as public companies that have shares which are traded on the top stock exchanges like American Stock Exchange (AMEX), Nasdaq and a few others.
What Qualifies as a Business Development Company?
In the United States, not all small and medium-sized companies can access funds from business development companies. There are certain requirements that qualify these companies for receiving capital from BDCs. The qualification fairness are as follows;
- The firm must be a domestic company or domicile in the region.
- The firm must be registered with the Securities and Exchange Commission.
- Domestic companies in dire need of financing can access BDCs.
- Private or public firms with a market value below $250 million can access funds from BDCs. BDC can invest the minimum of 70% of its holdings in such firms.
Investing in a Business Development Company
Usually, BDC investors are non-accredited investors who want to invest in startup companies. Investing in a BDC grants these investors investment access to private companies and a few companies. Private firms are typically hard to invest in but BDCs create this platform for investors. BDCs typically invest in illiquid securities. BDCs are registered according to section 54 of the Investment Company Act of 1940, they are thereby regulated. Over 90% of the profit that a BDC makes must be distributed among shareholders who are also its investors. This is why BDCs are quite attractive to investors, they have high yield of dividends.
Difference Between Venture Capital Funds and BDCs
There is a distinction between venture capital funds and BDCs. While venture capital funds contain a limited number of investors who are usually accredited and high-ranking investors, BDCs are made up of unaccredited investors. BDCs serve as alternative capital funding to venture capital funds. Venture capital funds are often available to wealthy individuals while BDCs are accessible by small and medium-sized private and public firms that are struggling with finances. BDCs are also traded on major stock exchanges and are regulated.
Academic Research on Business Development
- The business development company solution, Boehm, S. B., & Krus, C. M. (2001). Venture capital, 34(4). For public venture capital funds, the thorough analysis for appropriate structures must be considered as part of the BDC structure. Most often the BDC solution may be the most viable when the investment strategy or capital resources of the fund would make the portfolio companys control of investing unlikely.
- Promotion of private enterprise and citizen entrepreneurship in Botswana, Kaunda, M., & Miti, K. (1995). Development Southern Africa, 12(3), 367-377. The promotion of private enterprise related to Botswanas experience is discussed in this article. This article reveals the role of the private sector reciprocating the efforts in institutions for the development of entrepreneurship and dealing with government policies. In the broadest sense of the word a Entrepreneur is defined as an individual who has the ability to perceive opportunities that are profitable, willing to take on risks, and has the ability for the organization of business enterprises. Thus, anyone who has business enterprises established are by definition entrepreneurs. The main observation of this article is that even after acquiring adequate financial resources, and the installation of a comprehensive framework within the manufacturing industry primarily, the promotion of private enterprise has been unsuccessful. Drawing from the experience of Botswana, there are lessons that may be beneficial to other countries.
- Venture Capital Formation and Access: Lingering Impediments of the Investment Company Act of 1940, Bristow, D. K., King, B. D., & Petillon, L. R. (2004). Colum. Bus. L. Rev., 77. The U.S. economy is driven by innovation and invention and when it come to the collective imagination of the nation, both have a powerful grip. Silicon Valley entrepreneurs fill up the popular press with stories that are against all odds. The entrepreneur in these types of sagas are todays cowboy who is set to roam in the new frontiers just the same as the West was explored by early Americans. And at the side of the entrepreneur is the venture capitalist who is ready to help albeit for a tidbit of the action for themselves.
- A decision tree approach for integrating small business assistance schemes, Temtime, Z. T., Chinyoka, S. V., & Shunda, J. P. W. (2004). Journal of Management Development, 23(6), 563-578. Among public policy makers, researchers, and academics the general consensus is that for the advancement of both developing and already developed economies, entrepreneurship plays a vital role. Non-profit, private, and public organizations offer small business assistance programs as a result. A lack of coordination and a characterization of fragmentation in developing economies has been a high priority on the national agenda as it relates to public policy and the entrepreneurship research that are needed for the integration of these programs. With the goal to be the implementation of long-term sustainable development, assistance for small businesses is meaningful when it is designed in a systematic and holistic manner. The conceptual framework offered in this paper designs small business assistance on a model of integration. Major characteristics identified in this paper with appropriate assistance programs present a matching decision tree model in small firms. In the Republic of Botswana assistance programs for small businesses are reviewed in a case study for the production of empirical evidence that shows the need for the integration of a model or design. The implications of conclusions, discussions, and further research of the model for practitioners and policy makers is presented.
- The rise and fall of venture capital, Gompers, P. A. (1994). Business and Economic History, 1-26. In the United States economic development, the creation of new businesses and small firms have become potent forces. Before 1980 in the American economy the majority of new jobs were created by large businesses. A major shift has occurred in the last decade of 4 million jobs being lost in Fortune 500 companies across the U.S. During this time, smaller firms with less than 100 employees were able to create as many as 16 million new jobs. A fundamental change in the growth of the American economy occurred for the first time in the 20th Century.
- BDCs: The Most Important Commercial Lenders You've Never Heard About, Beltratti, A., & Bock, J. (2018). The Journal of Alternative Investments, 20(4), 8-20. The main purpose of a business development company (BDC) is to offer direct loans to enterprises that are small to medium sized and they are also known as a close ended mutual fund. Secondary markets are where most BDCs are traded and investors are provided with investment possibility that are liquid into assets that are relatively illiquid. Using comparison to banks, governance, organizational and operational structures and the main characteristics as financial intermediaries of BDCs, the authors review their relevance within financial markets. The returns offered by other asset classes are reviewed and compared to BDCs from the viewpoint of the financial investor.
- Can Venture Capital Foster Innovation in Canada? Yes, but Certain Types of Venture Capital Are Better than Others, Fancy, T., & Overall, C. V. (2012). E-Brief. Toronto: CD Howe Institute. September, 2(9). New patent applications that are quantitatively measured confirm in this brief that innovation is strongly linked to venture capital in Canada. Not all VC Funds equal strong performance. During the early beginnings of the lifecycle in a start-up, domestic firms are more involved according to the suggested data. The innovation in Canadian companies on a dollar to dollar basis reveal that VC funds of Canada are more closely linked than foreign funds. Government and corporate funds are less effective, but the best at creating innovation are institutional and private among domestic VC funds. No positive link can be determined between labor sponsored funds, retail, bank, or other forms of VTC. Venture capital is proven to be a correct focus for Canadian policy makers as a component that is critical to the promotion of innovation, however the outcome of innovation should be a more important criteria with less focus being applied to the actual size of the VC market and instead working on the right kind of VC funding.
- Business Development Companies: Cashing In on Private Equity?, Anson, M. (2004). The Journal of Private Equity, 10-16. In an extension of public equity markets to private equity markets well known private equity firms are raising billions of dollars in a rush to the market through business development companys (BDC). Public equity markets are easier to raise large amounts of funds through instead of private equity markets that can take 12 to 18 months to close. This article traces BDCs origins and reviews the structures and through recent deals provides an overview.
- Shedding New Light on Business Development Companies, Boehm, S. B., Krus, C. M., Pangas, H. S., & Morgan, L. A. (2004). The Investment Lawyer, 11(10), 1-9. In 1980, Congress enacted the Small Business Investment Incentive Act in response to a crisis perceived in capital markets. An exemption contained in Section 3(c)(1) of the 1940 Investment Company Act was the genesis of the crisis. Venture capital firms and private equity firms believed their ability to offer small, growing businesses financing was halted by limitations of Section3(c)(1). This led Congress to respond to their concerns through the Amendments enacted in 1980.
- Obtaining finance for high-technology ventures, Freyenfeld, W. A. (1983). In creating active venture capital markets and public policy, not only capital, but other services in the form of net and knowledge that lend to a greater number of successes. This not only effects high tech firms, but other businesses that began in the U.S. that offer employment to others that obtain venture capital investors and portfolio firms annually.
- Funding translational medicine via public markets: the business development company, Forman, S., Lo, A. W., Shilling, M. J., & Sweeney, G. (2015). Funding translational medicine via public markets: the business development company. A type of close-ended investment fund also known as a business development company (BDC) that offers certain requirements that are relaxed and are allowed to raise money in debt and public equity markets. They can be used through financial diversification for multiple biomedical ventures early stage funding to reduce the risk of translational medicine. For tax purposes a regulated investment company can be elected and to avoid double taxation through a BDC on net capital gains through shareholder distribution. Long-term investors are ideally suited for BDCs especially in biomedical innovations that includes (i) investors that understand the FDA approval process, and risks, with biomedical expertise, (ii) subject to certain restrictions, the Volcker Rule prohibits banking entities from investing in private equity and hedge funds, but investment in BDCs is permitted, and (iii) by gaining exposure to similar assets retail investors, invested in large pharmaceutical companies. Summarizing the requirements for the management and creation of BDCs, the history is described in this paper with the disadvantages and advantages in the structure for biomedical innovation funding.