What is a BDC?
Updated 5 July 2026 · 6 min read
A business development company (BDC) is a type of closed-end investment company, created by the US Congress in 1980, that invests primarily in the debt and equity of small and mid-sized private American companies. Most BDCs pay out at least 90 percent of their taxable income to shareholders, which is why they are best known as income vehicles.
A BDC pools investor capital and lends it to, or invests it in, private US businesses: the companies that are too large for local bank lending and too small for the public bond market. In exchange for financing that part of the economy, BDCs receive a special regulatory status and a tax structure that pushes nearly all of the income they earn back out to shareholders.
Where BDCs come from
Congress created the BDC in 1980 through the Small Business Investment Incentive Act, an amendment to the Investment Company Act of 1940. The intent was to channel public capital toward private American companies that struggled to raise money from banks and public markets. A BDC registers with the SEC, is regulated under the 1940 Act, and discloses its portfolio in public filings, which makes it one of the most transparent ways to hold private credit.
What a BDC actually holds
At least 70 percent of a BDC’s assets must be invested in eligible portfolio companies, which broadly means private US companies or very small public ones. In practice most modern BDCs are lenders: they originate senior secured, often floating-rate loans to middle-market businesses, sometimes alongside smaller equity stakes. A BDC must also offer significant managerial assistance to the companies it invests in, a requirement left over from the structure’s small-business mandate.
How the income works
Most BDCs elect to be taxed as regulated investment companies, the same tax regime mutual funds use. Keeping that status requires distributing at least 90 percent of taxable income to shareholders each year, so almost everything the loan book earns is paid out rather than retained. That is why BDC distribution yields typically sit well above those of broad bond funds, and why most of the distribution is taxed as ordinary income rather than as qualified dividends.
Leverage: the number to check
BDCs can borrow against their portfolios to amplify income. Since the Small Business Credit Availability Act of 2018, a BDC that obtains board or shareholder approval may operate at a 150 percent asset coverage ratio, which permits up to two dollars of debt for every dollar of equity. Leverage magnifies credit losses just as efficiently as it magnifies yield, so the debt-to-equity ratio is one of the first numbers to read on any BDC.
Traded, non-traded, and perpetual-life BDCs
- Publicly traded BDCs list on an exchange and trade like any stock, so the share price can sit at a premium or a discount to net asset value.
- Non-traded BDCs are sold at NAV through advisors rather than on an exchange. Liquidity comes from a share repurchase plan, typically capped at a percentage of shares each quarter.
- Perpetual-life BDCs are the modern non-traded form: continuously offered at NAV with, most commonly, quarterly repurchase offers of up to 5 percent of shares outstanding.
The non-traded forms are what places BDCs in the semiliquid bucket alongside interval funds and tender-offer funds: you can generally buy at NAV on an ongoing basis, but you exit through periodic repurchase windows that the board can cap or suspend.
What to weigh before investing
- Credit risk: the yield is compensation for lending to below-investment-grade companies.
- Leverage: up to 2:1 debt-to-equity magnifies both income and losses.
- Fees: most BDCs charge a management fee plus an incentive fee on income, so compare total expense loads, not headline yields.
- Liquidity: non-traded BDC repurchases are limited and can be suspended; listed BDC prices can trade far from NAV in stressed markets.
How a BDC differs from the other semiliquid structures
A BDC is defined by what it must invest in: US private companies, mostly through loans. Interval funds and tender-offer funds are defined instead by how they hand liquidity back, and they can hold anything from private credit to real estate to private equity. A REIT is the real estate counterpart, built around property rather than corporate lending. Many advisors hold several of these structures side by side, which is exactly why comparing them on cost, liquidity, and terms in one place matters.
Common questions
Is a BDC the same as a private credit fund?
A BDC is one specific, SEC-regulated wrapper for private credit. Unlike a private credit fund offered only to institutions or qualified purchasers, a BDC is registered under the Investment Company Act of 1940, discloses its portfolio publicly, and in its non-traded form is typically available to accredited or retail investors at lower minimums. The underlying assets, loans to private companies, are often very similar.
How are BDCs taxed?
Most BDCs elect regulated investment company status, so the fund itself pays no corporate tax as long as it distributes at least 90 percent of taxable income. Shareholders receive a Form 1099 and most of the distribution is taxed as ordinary income, because it comes from loan interest rather than qualified dividends.
What is a non-traded BDC?
A non-traded BDC is a business development company whose shares do not list on an exchange. Investors buy at net asset value on a continuous basis, and exit through a share repurchase plan, most commonly quarterly offers of up to 5 percent of shares outstanding. The board can reduce or suspend repurchases, so it is a semiliquid investment, not a liquid one.
Why do BDCs pay such high dividends?
Two reasons compound: BDCs earn relatively high interest lending to middle-market companies, often at floating rates, and their tax election requires them to pay out at least 90 percent of taxable income. The structure is effectively a pass-through for a leveraged loan book, so the yield reflects credit risk and leverage, not a free lunch.
Are BDCs regulated by the SEC?
Yes. BDCs are regulated under the Investment Company Act of 1940, file public reports with the SEC including their portfolio holdings, and are subject to leverage limits through the asset coverage requirement. Non-traded BDC offerings are also registered with the SEC.
Educational content by Kesta, the neutral data layer for liquid and semiliquid alternatives. Not investment, legal, or tax advice. Keep learning: What is an interval fund? · What is a tender-offer fund? · What is a REIT? · all guides · fund directory.