Non-Traded Business Development Companies (BDCs)
BDCs were created by the U.S. Congress to stimulate investments in privately owned American companies that may have limited access to debt and equity capital. Non-traded BDCs offer retail investors access to private debt, an asset class that typically has only been available to high-net-worth and institutional investors. By investing in a non-traded BDC, individuals are able to pool their capital to invest in private American companies.
BDCs are 1940 Act funds that are required to pay out 90% of taxable income as dividends and, therefore, have the potential to provide attractive streams of income through cash distributions to investors.
Potential Benefits of Investing in Non-Traded BDCs
Non-traded BDCs give individuals the ability to purchase shares in a managed portfolio of investments made to private American companies. Investor benefits may include:
- A complement to existing income-focused investments
- Institutional portfolio management
- Potential protection from rising interest rates
- An alternative source of cash flow
- Lower portfolio risk through reducing the correlation across major asset classes
- Potential hedge against inflation
Utilizing non-traded BDCs involves various risks including but not limited to loss of principal and limited liquidity. There is no guarantee that a BDC will be able to pay distributions. Distributions may be paid from sources other than income generated from the BDC’s investments.
How Non-Traded BDCs Work
Non-traded BDCs combine the capital of investors to finance and, in certain instances, participate in the economic upside of a portfolio of businesses. These companies intend to pass on earnings or interest payments to the non-traded BDC, which are used to pay monthly distributions to investors.
There is no guarantee that a BDC will be able to pay distributions. Distributions may be paid from sources other than income generated from the BDC’s investments.