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Why Private Equity’s Biggest Names Are Getting Into a Small-Loan Backwater

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In finance, boring and safe often go together. There could hardly be a more boring category name than business development companies (BDCs), or a more boring role than their original business model: turning money from mom-and-pop investors into loans to small and family-owned Main Street businesses. So how did private equity stars like KKR, Apollo, Blackstone and Carlyle Group fit in, or loans of $800 million? The transformation was part of a broader set of changes that led to the rise of so-called private credit, a domain that approached $1 trillion before the coronavirus upended markets. Along the way, BDCs saw yields and leverage increase -- even as lending standards slipped. Now BDCs have more excitement than many investors can handle.

Business development companies are a type of closed-end investment firm. Their roots go back to the Small Business Investment Incentive Act, passed by Congress in 1980 to give a boost to middle-market businesses -- in today’s terms, typically those with $100 million or less in annual earnings. The shares of a BDC can change hands like a stock. They’re also designed to give retail investors access to credit markets they are otherwise unable to bet on. In return for supporting small American businesses, the firms enjoy certain benefits, including significant tax advantages if they dole out at least 90% of their income as dividends to shareholders.