Income-hungry investors often look for unconventional opportunities for higher returns. A lesser-known group of investments called a business development company (BDC) can help satisfy their appetite.

What is a business development company?

The business development company invests money in private, small, and medium-sized companies. Typically, businesses run into problems and need help to grow or get back on track, and they may not be able to get funding through traditional means such as bank loans or bond issuance.

BDCs seek to generate income and capital appreciation when the companies they invest in are sold, similar to venture capital or private equity funds.

Benefits of BDC Investing

In addition to above-average dividend yields, BDCs have many benefits:

• Access to private companies. You gain access to private market investments that may otherwise be inaccessible or difficult to access for ordinary investors.

• Increased liquidity. Even if retail investors find a way to buy shares in private companies, they will face another problem: getting their money out. Publicly traded BDCs provide excellent liquidity, and you avoid having your cash locked up for an extended period.

• More transparency. As highly regulated public companies, BDCs are required by law to provide their investors with extensive information about their financial condition.

Despite its many advantages, BDCs are not without risk. For example, BDCs are heavily dependent on debt when they invest in their portfolio companies that are privately held or trade sluggishly, making them largely illiquid. An economic downturn like the one we experienced due to the Covid-19 pandemic could cause portfolio companies to go bankrupt and possibly default on their loans. BDCs are also sensitive to interest rate spikes, which can make it more expensive for them to borrow money, lowering their rate of return and ability to invest.