Business Development Company Definition
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.
A Little More on Business Development Companies
Under Section 54 of the Investment Company Act of 1940, in order to be considered a business development center (BDC), they must be registered to be in compliance. One of the major differences between a venture capital fund and a BDC is that smaller non-accredited investors under a BDC are allowed to invest in startup companies. BDCs rose to popularity for many reasons such as providing capital to companies that is permanent, the general public is allowed to invest, other companies can take advantage of financing through a wider array of sources like hybrid financial instruments, debt, and equity. Investments in companies that are developing or financially distressed can be made by a BDC in a closed-end fund. U.S. businesses that needed assistance in raising funds and fuel for job growth in 1980 received help from BDCs created by the U.S. Congress. BDCs not only provide advice, but they are intently involved in their portfolio companies’ operations. Small public firms with lower volumes of trading and private companies sometimes receive investments from BDCs.
In order to obtain the status to operate as a BDC, a firm is required to register their class of securities with the Securities and Exchange Commission (SEC), it must be a domestic company, and emerging businesses that are either recovering or suffering from financial difficulties are the only types that BDCs can invest in. Companies that are in the BDCs portfolio must receive managerial assistance. 70% of the BDCs assets that are within public or private U.S. firms that have less than a $250 million-dollar market value are the ones it must invest in.
Predominantly private companies that are most often harder to invest in offer exposure to equity and debt investments to investors through the BDC. 90% of the profits made by the BDCs must be distributed to shareholders, giving them dividend yields that are above average because BDCs are investment companies that are regulated.
Securities displaying substantially different yields from stocks and bonds will diversify investor’s portfolios through BDCs investments. BDCs portfolios might take quick and sudden losses and will have subjective fair value estimates because the majority of BDC holdings are invested in illiquid securities typically. When it comes to venture capital funds, the BDCs offer investment alternatives that are more attractive and primarily available to wealthy individuals using private placements and large institutions. To avoid classification as regulated investment companies, venture capital funds must meet tests that are asset related and they must keep a small number of investors. As available investments for the public, shares of the BDC are traded on stock exchanges typically. Those BDCs that decline to list on any of the exchanges must still follow the same regulatory rules as BDCS that are listed. For venture capitalists, provisions that are less stringent related to the amount borrowed, and equity-based compensation and related party transactions make the BDC as a form of incorporation more appealing than the assumption of an investment company’s burdensome regulations.
References for Business Development Company
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 company’s 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 Botswana’s 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 today’s “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 company’s (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 BDC’s 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 BDC’s 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.