Securities Lawyers Blog
In our prior post we recently highlighted, the rising popularity of non-traded business development companies (BDCs). BDCs may be one of the latest and greatest products that Wall Street is promoting that will provide outsized yield with less risk. As usual, these “new ideas” end with brokerage firms making lots of money and investors suffering the consequences.
BDCs make loans to and invest in small to mid-size, developing, or financially troubled companies. BDCs now fill the role that many commercial banks left during the financial crisis to lend to those companies with questionable credit. While BDCs are not new products, until very recently investors had only publicly traded closed-end funds that acted like private equity firms to invest in. These funds are risky enough. During the last downturn some of the publicly traded funds fell by 60%, 70% or more.
Like their non-traded REIT cousins, non-traded BDCs utilize a non-traded REIT-like structure and promote very high yields of 10% or more. There are some differences between BDCs and REITs, BDCs are regulated under the 1940 Act that governs mutual funds. There is also a big difference in valuation. BDCs are valued quarterly while non-traded REITs publish their valuations no later than 18 months after the offering period.