Considerations when forming a business development company

Competition in the asset management industry has accelerated at a relentless pace, resulting in an increasing popularity in business development companies (BDCs).

• Proper planning and data-based strategy are key to starting and running a BDC.
• There is increased and continuous burden associated with managing a BDC compared to traditional private funds.
• The learning curve is steep and investments can be highly sensitive to fluctuations in interest rates.

Over the last decade, competition in the asset management industry has accelerated at a relentless pace. Investors continue to seek higher yields, more favorable tax structures, and more transparency. Similarly, asset managers continue to expand fundraising efforts and broaden their investor base, as well as forming partnerships to construct larger and more flexible investment origination platforms and innovating the investment vehicle offerings to meet evolving investor needs. The result? An increasing popularity in business development companies (BDCs).

BDCs have been in existence since their creation by Congress in 1980, but the number and size of BDCs has grown exponentially in recent years. Specifically, debt-focused BDCs have provided an opportunity for managers to lend to small and mid-size companies not addressed by traditional financing sources and earn the corresponding income-based performance fee standard for BDCs. The prospect of launching a BDC, and therefore, capturing capital from retail investors while accessing a more permanent capital base, has multiplied in popularity with traditional private fund managers.

The author would like to thank Alyssa Erceg and Frank Duran for their contributions to this article.