Demystifying the Three Main BDC Structures

The private credit market has grown rapidly in recent years, becoming an estimated US$1.7 trillion to US$2 trillion industry.¹ Business development companies (BDCs) continue to be an appealing investment vehicle option for asset managers focused on private credit investments. In fact, BDC assets under management reached more than US$300 billion in early 2024, according to LSEG LPC.

BDCs are a hybrid type of closed-end funds that invest a majority of their assets in private U.S. operating companies – typically via debt investments – and share similarities with both operating companies and registered investment companies. There are three main types of BDCs: (1) publicly traded BDCs, (2) publicly offered, non-listed BDCs (non-traded BDCs), and (3) privately offered BDCs. The selection of which type is primarily determined by asset managers’ preferences for timing to market and target investors, including investors’ needs for liquidity, and the receptiveness of the various distribution channels to the asset managers’ product offerings. All BDCs, regardless of type, must be Securities and Exchange Commission (SEC)-reporting entities (e.g., filers of 10-Ks, 10-Qs, 8-Ks, etc.) and are subject to the same rules and regulations as one another under the federal securities laws.

Publicly Traded BDCs

There are approximately 50 publicly traded BDCs with over US$140 billion in assets under management in the aggregate according to the LSEG’s BDC Collateral.²  These BDCs are generally listed on NASDAQ and/or NYSE and have historically completed traditional IPOs, although a number have opted for direct listings. This type of BDC offers the most liquidity for investors, which can be both institutional and retail.

Non-Traded BDCs

Non-traded BDCs, which have over US$130 billion in assets under management in the aggregate,³ conduct continuous public offerings priced at net asset value per share. They are not listed on an exchange and thus generally have limited liquidity (e.g., via discretionary share repurchases) prior to conducting a liquidity event, such as an IPO. Liquidity events are generally scheduled to occur 5–7 years after launch. In the past two years, however, there has been significant growth in “perpetual-life” non-traded BDCs, which are designed to have an indefinite duration and reduce the risk of such BDCs being forced to liquidate assets during market downturns.

In addition to the federal securities laws applicable to all BDCs, non-traded BDCs are subject to state “Blue Sky” laws. Shares of non-traded BDCs are not listed on a national securities exchange, like publicly traded BDCs, or sold in accordance with the private offering rules of Rule 506 of Regulation D under the US Securities Act of 1933 (the Securities Act), like privately offered BDCs. Accordingly, shares of non-traded BDCs are not “covered securities” under U.S. federal securities laws, which requires non-traded BDCs to register their offerings in each state in which offers and sales are made, which process usually takes from nine to 12 months to complete in all relevant states. Despite the additional state registration and review process, asset managers may still find the non-traded BDC option appealing; the SEC has historically granted non-traded BDCs exemptive relief to offer multiple classes of shares, which may be made available to retail investors through multiple distribution channels. Varying sales charges and/or service fees cover the costs of selling shares and the particular features of each distribution channel.

Privately Offered BDCs

Privately offered BDCs, which have over US$40 billion in assets under management in the aggregate,⁴ are not listed on an exchange and thus also have limited liquidity. Unlike publicly traded and non-traded BDCs, privately offered BDCs do not register their equity offerings with the SEC under the Securities Act. Instead, privately offered BDCs complete their equity fundraising via “private placement” exemptions from the registration requirements under the Securities Act, typically via Rule 506 of Regulation D. As a result, asset managers often find that the time to market for privately offered BDCs is shorter than for their publicly traded and non-traded brethren due to the fact that privately offered BDCs avoid both the longer SEC review process for Securities Act registration statements and the state “Blue Sky” review process.⁵

Privately offered BDCs may conduct their private offerings at net asset value per share, via a capital call model or via monthly “immediate funding” closings, which have become more popular with the rise of the “perpetual-life” BDC offerings to high-net-worth investors. This trend has risen in part to address liquidity concerns – moving away from being structured similarly to private credit funds (i.e., finite life investment vehicles with an investment period and wind-down period), which generally provide the least liquidity of the options described here. The privately offered BDCs that have adopted the perpetual-life model typically provide quarterly liquidity via discretionary share repurchases. Over time, privately offered BDCs may change their structure to non-traded or publicly traded BDCs described above.