|Congress created Business Development Companies (BDCs) in 1980 to provide public investors another means to invest in the long-term growth of private U.S. businesses. BDCs invest their capital primarily in small and middle market private companies in the U.S. Typically, BDCs are structured to originate and hold debt and equity investments to maturity and can invest across a portfolio company’s capital structure.
In order to qualify as a BDC, companies must be registered in compliance with Section 54 of the Investment Company Act of 1940. Among other restrictions, BDCs are required to maintain an asset coverage ratio of at least 200% in order to borrow or pay dividends and to meet specific asset diversification requirements. In addition, BDCs that are regulated investment companies for U.S. federal income tax purposes, such as Ares Capital, are required to distribute at least 90% of investment company taxable income to shareholders in order to avoid corporate income tax on distributed taxable income.