Today, the entire financial industry is witnessing how business development companies (BDCs) are taking a greater share of assets under management. BDCs are investment companies that invest in private small and medium-sized businesses, with the goal of gaining a large share, and wielding significant management power.
Under the Internal Revenue Code, BDCs are classified as Regulated Investment Companies, which entitle them to special tax privileges. As long as they meet standards regarding income, asset diversification, and distribution, BDCs only need to pay minimal tax. Moreover, they are able to avail of high-risk loans with relatively less regulatory demands compared to banks.
But the landscape is changing. BDCs are now drawing far greater attention, which have since been resulting in growing efforts to regulate the sector, on top of the current policies that require them to file reports on a quarterly and yearly basis, and submit proxy statements to the SEC.
Some groups are complaining about the sizeable fees companies need to pay the BDCs and its top executives, in exchange for their guidance in boosting business growth.
Others are putting more focus on the risk inherent in the BDC framework: BDCs assume that the companies they invest in will grow phenomenally, yielding great returns for the shareholders. However, many other factors will affect the performance of an enterprise, and it is also possible that the investment will fail to generate a return. Massive investment can also mean massive losses.
At the same time, over at Congress, there are efforts to lift the limit set on the amount BDCs can borrow. Right now, BDCs can borrow based on the equity they have. Under the proposed bill, they can borrow under a 2:1 ratio: BDCs can get funds double the amount of what they possess.
Aside from generating more attention, this new bill will push many BDCs to expend more effort in order to double their target income, and be able to pay their loans and also distribute capital gains to their shareholder, and escape taxation.
To address these new considerations that mark the changing terrain they operate in, many business development companies are now enlisting the services of fund administrators. These administrators can implement cloud-based systems for processing of subscriptions, transfer and exchange, and recordkeeping. Fund administrators can also take care of such tedious administrative roles as drafting proposals and agreements and preparing reports, while the BDCs look for bigger opportunities for growth.
