Today, we’re talking about investing in a BDC also known as business development companies. This is one of the least understood types of funds out there, and perfect if you’re looking for something different.
What is a BDC?
A BDC isn’t set up like any other fund we’ve discussed before.
This is a fund specifically set up to help small and medium-sized businesses receive funding.
Put your money in this fund, and it’ll go toward a whole new company coming into being.
BDCs in modern times have taken up positions akin to personal lenders and consultants to businesses.
If a business wants to grow and expand, they may go to a BDC instead of a bank.
The BDC will give advice and help them earn the funding they need.
Occasionally, a BDC will care enough to put people on the board of a company they care about. They’re determined to see things through!
Advantages of Investing in a BDC
Ever dream of becoming a venture capitalist?
Investing in a BDC is a small-scale way of making that dream happen.
You can help smaller companies gather funding. But with much less risk than if you were to become a VC.
BDCs are also pretty transparent. They’re traded on the big stock exchanges and are usually public. They may be unique funds, but they’re not hidden away. That makes them perfect for people just starting out.
You can invest in a BDC even if you’re not yet an accredited investor. There’s sometimes no high minimum investment. If you’re new at this, that’s a rare opportunity.
Of course we can’t forget the biggest reason for investing in BDCs—dividends!
Despite their sometimes-risky investments, BDCs do their best to provide stable divide dividends to their investors.
Their investments are varied on purpose for this reason. These are a great way to add a healthy bit of risk.
Disadvantages of BDCs
The low barriers to entry in investing in a BDC sometimes mean that amateurs are attracted to this kind of fun.
You may be trying to build your portfolio with a BDC. But your fellow investors may sell faster than when may be wise. No one profits from that!
BDCs are can be treasured because of their variable interest rates, which respond according to market conditions and the success of the companies in which they invest. It can be profitable—or extremely stressful.
You may have qualms about investing in a BDC if you’re opposed to troubled companies receiving help when they’re distressed (as opposed to just dying out).
BDCs are sometimes used to boost companies in trouble. If you’d rather know your money is just going to new companies, do your research first.
Or, of course, you can find ways to invest directly in new companies via crowdfunding platforms or private placements.
But wait! What’s the Difference Between a BDC and a Closed End Fund?
These funds are structured very similarly. They’re often both used for passive income, and they’re both considered good choices for beginning investors.
BDCs are typically considered riskier than CEFs.
This is due to their tendency to dump money into smaller companies, upping the earning potential from those investments but also risk. Add in the shifting interest rate, and you have a much more cantankerous portfolio option!
My Top BDC Picks for Investing in a BDC
As always, you should consult with your broker and do your research before major purchasing decisions.
These are my suggestions according to my knowledge. Every portfolio is different and requires different things for optimal earnings.
Prospect Capital Corporation (PSEC): This company invests in a variety of different industries, from energy to consumer goods. That means you have a higher chance of earning a stable return from it! They’ve also recently doubled their number of available shares. This signals that they’re looking for more people to join in on the potential profits. Are you in?
Main Street Capital (MAIN): This is the “fun” option on my list of recommendations. Main Street invests in a lot of equity, like a lot of BDCs. But they’ve recently experienced a big bump in profits thanks to their investments in… cryptocurrency! Yes, they’re interested in that new and volatile industry. 7% of their profile also consists of investments in retail companies. This group is definitely more willing than most to take a risk.
BlackRock Kelso Capital (BKCC): The name BlackRock should look familiar to you if you follow my blog. Unlike Main Street, this fund is considered very solid and just invests in businesses. But it’s had some recent losses. I’d recommend watching this particular fund for the upswing (which seems inevitable, given it’s pedigree). It might be the biggest dark horse BDC of 2018.