Business development companies offer great dividends, plus bonuses to income hungry investors. Tempting, but look closely before you leap.
By Hank Tucker, Forbes Staff
With interest rates at heights not seen in nearly two decades and traditional len-ders still shell-shocked from this past spring’s bank runs, private credit, or nonbank direct lending, is booming on Wall Street. Yield-chasing institutions have poured into the sector, which now amounts to $1.5 trillion globally. But pension funds, endowments and other big players need not be the only investors feasting on high yields.
A great way retail investors can partake in private credit’s spoils is by buying the stocks of business development com-panies (BDCs). These outfits are required to lend to small or medium-sized businesses, which usually don’t have access to public debt markets. There are more than 130 BDCs, according to the Small Business Investor Alliance. The largest is the $48 billion Blackstone Private Credit Fund (BCRED), which yields about 10% currently. That fund is sold exclusively through financial advisors and limits redemptions at book value to once per quarter. But Blackstone and every other major private equity firm—including KKR and Apollo—plus credit specialists like Ares Management and Blue Owl also offer publicly traded BDCs with daily liquidity. These funds are currently offering annualized yields from about 6% to more than 16%.
These purveyors of private credit have track records of strong credit performance and dependable returns without taking on too much risk.
Most BDCs are required to pay out 90% of their earnings to investors as dividends, and the majority of loans in a typical BDC’s portfolio are floating-rate, giving them a measure of protection against interest rate swings. Many BDCs, such as Blue Owl Capital (OBDC), which has $12.9 billion in assets, have raised their