Funds that elect to be regulated as a BDC may sell shares
on public exchanges, giving them a permanent supply of
capital to lend without the need to raise funds every couple
of years. Unlike a private equity firm, a BDC is not required
to return principal funds to limited partners within a
fixed time period. Instead, it delivers value to shareholders
through dividends—issued monthly or quarterly—
distributing at least 90 percent of its taxable income every year.
While the 1980 amendment opened the door for BDCs,
trends within the banking sector largely contributed to their
formation. Over the past two decades, commercial banks have
been consolidating. As they’ve grown, their focus has shifted
away from middle-market lending—generally noninvestment
grade and nontraded loans—and toward larger deals.
Simultaneously, various regulations have restricted leveraged lending by banks. Glass-Steagall, Dodd-Frank and Basel
III are among the laws that reduced their ability to lend.
Like many in the sector, Joe Alala III, chairman and CEO
of business development company Capitala Finance Corp.,
sees those laws as an opportunity. “We potentially have a
regulatory tailwind for multiple decades that will push
leveraged lending into specialty finance,” he says.
The numbers reflect the size of the opportunity. The
U.S. middle market comprises nearly 200,000 businesses,
whose revenue accounts for 33 percent of private sector GDP,
according to the National Center for the Middle Market.
Alternative lenders, including BDCs, have stepped in to fill
the lending gap created as banks pull away. According to the
Small Business Investor Alliance, today there are more than
84 BDCs, 57 of which are publicly traded. Since 2011 there
have been 21 new BDC IPOs, and BDC loan balances have
more than tripled since the start of the 2008 financial crisis.
Ashton Poole, president and chief operating officer of
Triangle Capital Corporation, a Raleigh-based BDC, notes
the important role firms like his play in the market.
“As banks and other lenders retrench and exit key markets,
BDCs are increasingly able to provide much-needed capital
to privately held companies,” he says.
“AS BANKS AND OTHER
AND EXIT KEY MARKETS,
BDCS ARE INCREASINGLY
ABLE TO PROVIDE
TO PRIVATELY HELD
President and COO,
Triangle Capital Corporation