The History of BDCs: Part 2
As I discussed in part I of The History of the BDC Industry, the 1980 Amendments were intended to readjust the Investment Company Act established in 1940. The Act had restricted the amount of people allowed to mutually own funds in private equity and venture capital firms. By the 1970s, companies were displeased with the effects of the 1940 Act, convincing Congress that it was limiting the funds going to emerging businesses and hindering their growth.
The Small Business Investment Incentive Act passed in 1980 sought to increase the amount of money feeding into small, fledgling businesses. The Act served to remove restrictions from the Investment Company Act of 1940 by creating the Business Development Company. Different from private equity and venture capital firms, the BDC was another kind of investment company altogether which provided anyone the opportunity to buy a share on the open market.
Only a number of BDCs arose before the turn of the decade. Spurred by the growth of the Private Equity Industry in the 1980s, BDCs began to form more rapidly in the early 2000s. The industry closed 2008 with a total of 21 business development companies.
The current industry
In the last twenty years or so how has the BDC market expanded and affected the investment industry?
Compared to the 27 listed BDCs in 2009, the number of entitles listed as BDCs rose to almost 50 by 2013 with a CAGR of 39% according to one study. One reason for this increase over the last decade could be due to the distinct investing benefits and advantages of this type of company. These advantages have allowed BDCs to avoid double taxation while incurring often high dividend yields as well as the increase for private equity and venture capital opportunities. As of now, in terms of market value, a few of the big name BDCs include Apollo Investment Corp, American Capital Strategies, Allied Capital Corp, Gladstone Investment Corp and Kohlberg Capital Corp.
The question to ask is whether there are emerging issues BDCs will need to face in 2015. The somewhat difficult 2014 year for the BDC market might very well affect the industry in 2015.