Business Development Companies (BDCs) are special investment vehicles regulated by the SEC. They were created in 1980 with one main purpose: to help small and mid-sized businesses get the money they need to grow.
Why? Because these companies are usually too small or too risky to borrow easily from big banks, and unlike large corporations, they often can’t raise money by issuing stock on public exchanges. Going public is expensive, requires strict disclosure rules, and only makes sense once a business has already reached a certain size. That leaves many promising businesses stuck in the middle: too large to survive on personal financing, but too small to tap public markets.
This is where BDCs step in. They act as direct lenders, providing financing in the form of loans such as:
- First-lien secured loans (Senior Debt) – loans backed by the borrower’s most valuable assets, giving lenders first claim in case of default.
- Second-lien or mezzanine loans (Junior Debt) – higher-risk debt that comes with higher interest rates.
- Unitranche loans – a blend of senior and junior debt in a single package.
For investors, the appeal of BDCs is that they open the door to private credit*, an asset class once reserved for big institutions. Everyday investors can now put money into a BDC, which in turn lends to dozens or even hundreds of small businesses.
*Private credit is lending done by non-bank institutions directly to companies
A large portion of BDC loans are tied to floating interest rates. Unlike fixed-rate bonds, which pay the same coupon no matter what happens to interest rates, floating-rate loans adjust their payouts as rates changes. That means when borrowing costs climb in the economy, BDCs can often pass those higher interest payments back to investors as larger dividends.
Put simply, BDCs are a way for investors to:
- Support growing small and mid-sized companies.
- Gain exposure to private credit markets.
- Earn attractive dividends that can rise when interest rates are high.
Unlock high-yield income with BDCs. Learn what they are, how they work, and the strategies to evaluate them inside the Income Investor™ Course.
Where does BDCs sit in the Private Credit Landscape
To understand where BDCs fit, it helps to zoom out and look at private credit as a whole. Private credit simply means lending that happens outside of the traditional banking system or public bond markets. Instead of issuing bonds or borrowing from big banks, businesses borrow directly from private lenders.
Over the last decade, private credit has exploded in size. Today, BDCs represent about 20% of the US private credit market, with a growing market cap. In other words, BDCs are no longer niche, they’ve become a core gateway for individual investors into a market once dominated by institutions.
Another key difference is liquidity. Traditional private credit funds, such as direct-lending funds, often require investors to lock up their capital for 5–10 years. In contrast, listed BDCs trade on public stock exchanges, giving investors the flexibility to buy and sell shares daily.
This combination of higher yield potential and better access explains why BDCs have become one of the fastest-growing retail investment vehicles in private markets.
The Anatomy of a BDC portfolio
A typical BDC portfolio is built around private loans to middle-market companies.
For most BDCs, this means:
70%+ in private loans, with a heavy focus on first-lien senior secured debt (the safest layer of debt, backed by company assets).
Some exposure to junior debt such as subordinated or mezzanine loans, which carry more risk but pay higher interest.
Opportunistic equity or warrant co-investments, giving upside if portfolio companies grow or are sold at a premium.
Real-world example: Ares Capital Corporation (ARCC)
As of June 30, 2025, ARCC managed a $27.9 billion portfolio across 566 companies, making it the largest BDC by market cap. Its investments show the breadth of industries that BDCs typically finance:
Snapshot from :https://www.arescapitalcorp.com/portfolio
Healthcare: Dental services providers like Absolute Dental Group and biotech firms like ADMA Biologics.
Software & Services: Companies such as Actfy Buyer, Inc. (fraud management software) and Anaplan, Inc. (cloud-based business planning).
Consumer & Industrials: Businesses ranging from American Residential Services (HVAC and plumbing) to Align Precision Group (machined components for defense and industrial use).
Energy & Renewables: Apex Clean Energy (wind and solar power facilities).
This diversity is intentional. By spreading loans across hundreds of companies and industries, ARCC and other BDCs reduce the risk of any single borrower defaulting.
Key characteristics of a BDC
Floating-rate loans dominate BDC portfolios. These loans reset their interest rates based on benchmarks (like SOFR), meaning income rises when interest rates increase. This has boosted payouts in the recent high-rate environment.
Sector focus varies by manager, but common themes include software, healthcare, consumer services, and industrials. Many are businesses that are large enough to need institutional capital but not large enough to raise money through public stock or bond markets.
In short, a BDC portfolio is a blend of secured loans, higher-yield junior debt, and selective equity stakes, diversified across industries all structured to generate strong, recurring income streams for investors.
Why are BDC Yields So High Compared to Other Dividend Income Assets?
One of the first questions investors ask is: why do BDCs pay such high dividends compared to REITs, regular dividend stocks, or bonds? It seems too good to be true. The answer comes down to how they’re structured and the risks they take on.
As you know BDCs lend to non-public, middle-market companies, businesses that can’t raise cheap funding from banks or issue stock easily. To compensate for that higher risk, they charge higher interest rates.
Finally, BDCs operate as regulated investment companies (RICs), which requires them to distribute at least 90% of their taxable income each year. Put together, these factors explain why BDC yields are consistently higher than most other dividend-paying instruments.
But high yield comes with trade-offs. Lending to smaller, non-public businesses means credit cycle risk, defaults* and non-accruals tend to rise in recessions.
Defaults happen when a borrower fails to meet their debt obligations, such as missing interest payments or not repaying the loan principal.
For listed BDCs, there’s also NAV volatility, since shares trade on stock exchanges and can swing to premiums or discounts relative to their underlying value.
When you compare BDCs to other income assets:
- BDCs vs REITs: Both must pay out most of their income, but REITs earn rent from real estate while BDCs earn interest from private loans.
- BDCs vs Dividend Stocks: Stock dividends depend on profits, which can be cut at management’s discretion; BDC payouts come primarily from contractual loan interest.
- BDCs vs Bonds: BDCs typically offer higher yields than investment-grade bonds, but with more credit risk and lower liquidity.
How to Invest in BDCs Private Credit Funds
There are several ways investors can access BDCs, and each comes with its own balance of fees, liquidity, and transparency:
Listed BDCs: These are traded on public stock exchanges, offering daily liquidity and transparent pricing. The trade-off is market volatility.
Non-traded/publicly offered BDCs: These BDCs don’t trade on the stock exchange. Instead, they’re usually sold through financial advisors or wealth management platforms. Because their prices are updated only once every quarter, they are typically not as volatile as listed BDCs.
Private BDCs: Targeted at accredited or institutional investors, these operate more like private funds, with limited transparency and lock-ups.
Ready to tap into the world of high-yield private credit? In the Income Investor™ Course, we dive deep into what BDCs are, how they operate, and most importantly how to properly evaluate them for sustainable dividends. You’ll also discover smart exit strategies to manage risk and lock in gains.
Simple Methods to Evaluate BDCs
Just like with any investment, it’s important to understand what you’re actually buying when you put money into a BDC. On the surface, the appeal is clear: high dividend yields and access to private credit. But under the hood, not all BDCs are created equal. Some are better managed, more conservative with debt, and more disciplined in choosing businesses to finance.
So before investing, you’ll want to look at a few key metrics and practices that reveal the quality and stability of a BDC.
Factors when evaluating BDCs
- Dividend sustainability: A high yield isn’t meaningful if it can’t be maintained. By law, BDCs must distribute at least 90% of taxable income to keep their tax advantages, but some pay out more to boost headline yields. When payout ratios consistently run too high, the risk of dividend cuts increases.
- NAV stability: For listed BDCs, keep an eye on the Net Asset Value (NAV) per share. If the NAV has been stable or growing over time, it suggests good portfolio management. Also note whether the shares trade at a premium or discount to NAV.
- Manager quality: A BDC is only as strong as the team running it. Look at the manager’s track record, the size and scale of their platform, and how disciplined their underwriting process is. Large, established managers often have more resources to weather downturns.
- Financial strength: Check asset coverage ratios (which measure how much debt the BDC is using) and overall debt ratios. Lower leverage generally means more cushion in bad markets, while aggressive use of debt can amplify both gains and losses.
BDCs themselves borrow money (use debt) to fund their lending, so strong balance sheets and manageable leverage are critical to their stability.
Investing Through BDC ETFs
For investors who prefer not to pick individual BDCs, there are also BDCs ETFs, which package multiple BDCs into a single tradable fund. The most widely known is the VanEck BDC Income ETF (BIZD), which holds large players like Ares Capital (ARCC), Owl Rock, and Main Street Capital. The appeal is instant diversification and simplicity, you gain exposure to a huge chunk of the BDC sector with just one ticker.
TradingView Chart of BIZD vs ARCC adjusted for dividend
Performance-wise, BDC ETFs have historically delivered yields similar to individual BDCs (often in the 8–11% range), but their total returns can lag the well managed single BDCs because the ETF is weighted across strong and weak performers alike.
Final Thoughts
BDCs have carved out a unique role in the investment landscape. They serve as the retail bridge into private credit, giving everyday investors access to high yields, diversified portfolios, and greater liquidity than traditional private funds.
But it’s important to remember that high dividend payouts do not equal safety. Naturally, BDCs lend to smaller, non-public businesses, and are exposed to credit cycles, defaults, and the skill (or lack thereof) of their managers.
BDCs are a powerful way to tap into private credit and high dividends, but they’re only one piece of the puzzle. In the Income Investor™ Course, you’ll learn not just how BDCs work and how to evaluate them, but also how to combine them with bonds, REITs, and dividend stocks to build a complete, resilient income portfolio.
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