Hi I’m Jimmy in this video we’re looking at the basics of business development companies or BDC is for short. We’re going to run through how the dividends for BDC can be as high as they are. Then we’re going to look quickly at two different BDC is to get an idea of what BDC tend to do then in the end we’re going to look quickly at where business development companies could fit in our portfolio. Okay let’s get start with the very basics. So what is a BDC a business development company is a publicly traded fund that is essentially like a private equity fund or a venture capital fund. So generally BDC is focused on the middle market companies. So middle market companies can broadly be defined as companies valued between somewhere between 100 million and a billion dollars. So basically a BDC invests in middle market companies perhaps they make a loan to that company and then collect interest payments or perhaps they buy a piece of that company by taking a piece of equity or they become a shareholder. So for us investors this can be interesting because this allows us to invest essentially in a venture capital like structure except for this one is publicly traded and we can buy or sell it just like we would buy an ETF or read or a closed end fund. So let’s look quickly at two examples. The first one is areas capital ticker symbol a BDC. And this actually brings us to the top reason why many people like investing in BDC is that’s their dividend. So over the past 12 months a BDC has paid about a dollar 62 in dividends and given that their stock price is trading just short of nineteen dollars a share. Well that would give areas capital a dividend yield of more than eight and a half percent. How do they do this we ask. Well just like a real estate investment trust we’ve got a master limited partnerships business development companies don’t pay corporate income taxes as long as they pay out the majority of their profits as distributions to shareholders. So this helps keep their dividend much larger than the typical company. OK. Let’s look at what a BDC actually does from an investment perspective. So this one slide I took out of an investor presentation and I know there’s a lot going on here. But generally speaking this does a good job of laying out what not just what areas does but also what Beatty sees in general tend to do. So let’s break this one down a bit. So this top section here called products. Well this is what BDC offers to the companies that they invest in. So basically we can look as at a BDC as a bank or as somewhere between what we most normally might think of as a bank bank lending money and a venture capital company which typically invests in startups this lands somewhere in the middle of that BDC is a very similar except they do it for the middle market companies. OK. So we can really separate this into two different categories. The ones in the green box. Well this is where the BDC makes equity investments into the company. So essentially they’re getting a piece of the stock of that company and then the other ones are mostly loans that the BDC is make. Now this is important because BDC is generally are going to be dominated by the loans that they make to companies. Then when we jump down to the next section well here this tells us generally what the company tends to do with the money that they get from BDC is either through a loan or through an investment of some sort. So here we could see that a lot of this revolves around the growth of the company. Maybe it’s an acquisition that the company wants to make or restructuring or maybe the companies look to looking to fund just its general growth. Either way it’s a BDC that can often help fund this next level of growth and in return the company goes ahead and pays the BDC in an interest rate or fees or perhaps dividends if the BDC took an equity stake. Now if we’re wondering why what types of companies BDC tend to invest and here’s a pie chart once again from areas presentation and we could see that they’re all spread out amongst a ton of different industries. Now that’s true for areas but not true for everybody. So now jump over to another BDC and to get another aspect of what BDC might do. So the next one is the Apollo Investment Corporation ticker symbol a I envy now Apollo has paid forty five cents a quarter for the past four quarters giving us a total of a dollar 80 given that they’re trading at slightly less than sixteen dollars and 50 cents. Well that’s a dividend yield close to eleven percent now wants to go to Apollo’s Web site. This is on the front page. We could see that they have investments of two point six billion. Now this is significantly smaller than areas areas is one of the largest out there. So it’s wide ranging. They also say that 71 percent of their loans are first tier debt which is a good thing tends to be a good thing as in theory they have first rights to collect. They also say they invest in one hundred twenty nine companies and ninety nine percent of their loans are floating rate loans. And this could usually be a good thing for BDC It’s not just so we’re all on the same page. A floating rate loan is when the bank when there is a benchmark rate of some sort. Maybe it’s the 10 year treasury or lie board that’s going away. Or maybe it’s the prime rate. So basically they take a benchmark and they say OK. The benchmark is going to be the prime rate and we’re going to add 3 percent to that or 2 percent or whatever it is. And then the payments or the interest charge to the customer moves around based on where the underlying interest rate is. So either way as interest rates move up or down. Well in theory there could be some consistency to the profits. That’s why Apollo would bring this element the first page. Now this could also lead in theory to consistency of dividends. Now I happen to have looked at the history of Apollo and they’ve actually dropped their dividend a few times. So I just want to bring out that this is not intended to be an analysis of Apollo or areas capital. I’m just using these as examples to illustrate how BDC sees work in general. If we want to see a more thorough analysis on either one of these BD Cs or perhaps a different BDC altogether please let me know in the comments below and we could do a more thorough analysis of their holdings their value things along those lines. OK. So to summarize BDC sees are an investment that traditionally landed somewhere between typical stocks and bonds although a bit closer to the bond side and happy to trade like stocks. That being said I do think that it would make sense if this was going to be a piece of our portfolio. I think that it would make sense to diversify with at least a couple holdings but perhaps we want to be involved in a particular sector maybe the technology sector. Well a BDC like Hercules Capital ticker symbol HTGC well they might be something we’d be interested in because unlike areas that’s all spread out Hercules tends to focus mostly on technology companies. Then another thing to consider with BDC in general is we need to watch the feeds now these fees aren’t directly comparable to the fees of an ETF or a mutual fund but generally management fees are something that is included that comes out of revenue and depending on whether or not the BDC is internally managed or externally managed could the the fees they’re going to be there. And we it’s something that we’re going to want to identify and see what we think of their overall profitability and returns things like that. Now when it comes to valuing of BDC I’ve seen price to book use I’ve seen some analysts target a what they believed to be a sustainable dividend rate and then base the value off of that dividend rate. So that is the basics of BDCs and basically a BDC is a something that would give us access to the middle market lending to the middle market. The question is do you think we should do a deeper dive into any of these BDC or maybe we can create a top three list or something like that that could be interesting let me know what you think in the comments below. Do you think that access to this middle market lending area with high dividend yields but somewhat volatile movement in the stock price do you think that’s a good investment. Let me know what you think in the comments below. If you haven’t done so yet please hit the subscribe button. Thank you so much for stick with me all the way into the video. I’ve seen the next video. Thanks.