Business development company

A business development company, or BDC, is a closed-end investment company under US law that invests in the securities and loans of unlisted companies. Its status is set out in section 2(a)(48) of the Investment Company Act of 1940: the company is organised under the laws of a US state, has its principal place of business there and makes significant managerial assistance available to the companies it finances. Section 55 of the same Act requires qualifying assets to represent at least 70% of total assets at the time of each acquisition of any other asset. These qualifying assets are mainly securities of eligible portfolio companies, meaning companies organised under the laws of a US state and having their principal place of business there. A French company does not meet this condition. A BDC that lends to it places the loan in the 30% bucket open to other assets, where it competes with the BDC’s other non-qualifying investments. An asset coverage ratio of 200% limits the BDC’s leverage. Shareholder or board approval lowers this ratio to 150%, which allows the BDC to borrow more in order to lend. For a European borrower, a BDC is one lender among other private debt funds, and its capacity to take on a deal outside the United States depends on the room left in its non-qualifying bucket.

A French mid-sized technical distribution company seeks €80m of unitranche debt. A BDC listed in New York reviews the deal. Its total assets reach $2bn and qualifying assets represent 74% of them. The loan to the company falls into the non-qualifying bucket: before issuing an offer, the BDC checks that its qualifying assets represent at least 70% of total assets at the time of the acquisition.

• The BDC keeps at least 70% in qualifying assets: a non-US borrower falls into the remaining bucket
• The asset coverage ratio of 200% or 150% limits the borrowing of the lending fund
• The managerial assistance offered to financed companies and what it covers in the documentation
• The room available in the non-qualifying bucket at the time of the offer