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Not investment advice. Educational reading. See Disclaimer.
L.1 · INTERMEDIATE · 2 MIN

What is a Business Development Company?

A Business Development Company (BDC) is a publicly traded fund that lends money to mid-sized private companies (typically issuers borrowing $10M-$100M). BDCs are Regulated Investment Companies (RICs) under the Investment Company Act of 1940. Distributing at least 90% of investment-company taxable income (IRC Subchapter M, sections 851-855) eliminates corporate-level tax on the distributed portion. To also avoid the 4% excise tax under IRC section 4982, most BDCs target at least 98% of ordinary income and 98.2% of capital-gain net income. Net long-term capital gains have separate distribution rules. The 90% threshold is qualification; the 98% threshold is excise-tax avoidance - both matter for retail investors modelling BDC distribution coverage.

Quiz · 5 questions ↓
§ 01

BDCs let public investors access middle-market private credit -- a market normally reserved for institutions and direct lenders.

§ 02
VehicleWhat it ownsTax treatmentLiquidity
BDCPrivate middle-market loansPass-through (90% rule)Daily on exchange
REITReal estate / mortgagesPass-through (90% rule)Daily on exchange
Mutual fundPublic stocks/bondsPass-throughDaily NAV
Hedge fundAnythingPartnershipQuarterly+ lockups
§ 03
Open the BDC view (/?view=bdc) and look at the list of public BDCs. Notice how each shows a yield far above the S&P 500 average.
§ 04

Distributing 90%+ of taxable income lets a BDC qualify as a Regulated Investment Company (RIC) under Subchapter M of the tax code. That election avoids corporate income tax -- the BDC acts as a pass-through, and shareholders pay tax on divi

§ 05
A newly-launched BDC raises $100M at $10/share NAV. After 3 months, NAV is $9.50 and it trades at $9.20. Is this a concern?
Five questions · AI feedback

Sit with the ideas.

Why must a BDC distribute at least 90% of its taxable income as dividends?

Why:
Try this in paper trading

BDC yield spread vs Treasuries

Pick a publicly-traded BDC (ARCC, BXSL, OBDC, MAIN, etc.). Compute the spread between the BDC's dividend yield and the 10-year Treasury yield. Paper-buy with a thesis explaining whether the spread compensates for the credit risk you're taking.

Open paper portfolio →

Practice mode — simulated trades, not investment advice.

Other lessons in this course.

  1. 01What is a Business Development Company?— reading now
  2. 02Reading a BDC's Schedule of Investments
  3. 03NAV and Premium / Discount
  4. 04Yield Decomposition -- Is the Dividend Safe?
  5. 05Non-Accruals -- The #1 Credit Metric
  6. 06Leverage and Regulatory Limits
  7. 07Manager Quality and Alignment
  8. 08Building a BDC Watchlist
See it on a real ticker →