Business development companies
The intent of Congress, when it passed the Small Business Incentive Act of 1980 was to provide a platform for capital and managerial expertise to small firms without access to public capital markets. BDCs are closed end investment firms. They can raise up to $5M a year in Reg E stock. Their debt to euity cannot exceed 200%. They cannot own more than 10% of any firm's voting stock and cannot place more than 5% of their equity with any one firm. THey cannot hold more than 25% of their assets in any one industry or have more than 25% of their assets in one company. They must distribute at least 90% of their taxable income. They can be either internally or externally managed. The former is far better for the small investor, as the haircur is not as severe and the deals are better managed and profits more equitably shared.
BDCs invest in small companies in which they see an opportunity for profit. While this group represents more than 65% of all employers, the failure rate can exceed 90%. Internally managed BDCs have 'skin in the game', an important consideration.
BDCs offer the possibility to enhance the distributon yield for retirement income. 5% of a portfolio here can add 1% to the overall portfolio distribution yield. Hold them in a qualified account for sake of tax simplicity. Alternatively, the K-1s they report upon may offer tax advantage to the sophisticated investor and her CPA (the CPA who is not put off by the complex reporting concerns).
Quantumonline.com is an excellent first stop source for information on the BDC world. If these are used, a 10% stop loss is always required. LIquidity can dissolve in a bear market, so exit early rather than wait to be the last to leave this party. There are currently 33 BDCs on offer. ALD is in play. ARCC, TAXI, PNNT, PSEC, RAND, TICC & TTO are some of the more interesting names here. Enjoy.