This story appears in full in the September issue of Middle Market Growth.
When General Electric announced in April 2015 plans to shutter its lending unit, capital providers were watching closely, eager to see the impact on middle-market lending, where GE Capital had established itself as a major player.
Among those waiting for the effect on the market were business development companies, alternative investors that lend to small and midsize businesses. Many BDCs are publicly traded, and the headwinds of strong underwriting competition and downward pressure on yields have made it challenging to deliver value to shareholders and bolster stock prices. Well before GE made its announcement, business development companies had begun evolving in response to market forces.
BIRTH OF THE BDC
BDCs were created in 1980 through an amendment to the Investment Company Act of 1940 intended to increase financing available for growing businesses. A BDC must meet diversification requirements across its portfolio and file periodic reports with the Securities and Exchange Commission.
Funds that elect to be regulated as a BDC may sell shares on public exchanges, giving them a permanent supply of capital to lend without the need to raise funds every couple of years. Unlike a private equity firm, a BDC is not required to return principal funds to limited partners within a fixed time period. Instead, it delivers value to shareholders through dividends—issued monthly or quarterly—distributing at least 90 percent of its taxable income every year …