All of these financial giants have BDC arms that provide capital to middle market businesses. These are defined as companies with annual revenues of $10 million to $1 billion that employ between 100 and 2,000 workers.
Venture Capital vs. BDCs
The differences between venture capital funds and BDCs are primarily of interest to investors.
VC funds are required to keep a limited number of investors and must meet certain asset-related tests to avoid being classified as regulated investment companies. BDC shares, on the other hand, are typically traded on stock exchanges. They are available as investment opportunities for the public.
Manuel Henrique, founder of Hercules Capital explains, “I really want to create an investment vehicle where the average Joe and Mary, the average investor on the street, can gain access to the privileged world of venture.”
If you are looking for working capitals, you probably don’t care if the money comes from Warren Buffet or Joe Smith down the block. But BDCs smaller investors can be nimbler than the rich guys.
BDCs are not new. They have been around since 1980 when Congress passed the Small Business Incentive Act, opening the funding gates for the middle market.
Benefits for Borrowers
BDCs are required to invest at least 70% of their assets in private or public U.S. firms with market values of less than $250 million. These are often young businesses, seeking financing, or firms that are suffering or emerging from financial difficulties.
BDCs also must provide managerial assistance to the companies in their portfolios – an added bonus.
BDCs usually specialize in lending to certain types of industries. Northern California-based Hercules veers towards the tech sector. Its portfolio companies focus on Life Sciences, Technology, SaaS Finance and Sustainable and Renewable sectors.
Later stage companies can take advantage of Hercules Special Situation financing. These are senior secured loans to help companies grow and develop their business during times of change or during inflection points that are not readily served by typical financings.
Ares Capital, which tops the BDC list with almost $6 billion in market capital, primarily finances:
- Health Care Services
- Software & Services
- Commercial & Professional Services
- Consumer Services
- Consumer Durables & Apparel
Currently 51 BDCs are traded on the U.S. stock exchanges, with a total market capitalization of $35,489,335,502. Take the time to check out some of the companies on the list. One of them may have the key to capital infusion for your company.
Benefits for Investors
BDCs are organized as pass-through tax structures so they must distribute at least 90% of their taxable income as dividends to investors to avoid taxation at the fund level. Again, this appeals to investors looking for dividend yield, especially during low interest rate periods like the current one, when bonds don’t generate much yield.
Which means that BDC investors are less gun-shy, which could translate into more money for your business.
BDCs can make either debt or equity investments in their portfolio companies, but most BDCs provide debt capital. This is another positive –you don’t have to give up control of your business.
If your business needs capital in this turbulent time, BDCs can offer a safe solution.