Business development companies (BDCs) were created in 1980 to encourage the flow of public equity capital to small private businesses. Although they make investment loans and equity investments like banks, private equity and venture capital funds, BDCs are regulated by the Investment Act of 1940 and trade on exchanges like shares of stock. Today, BDCs are a small but fast-growing segment of the alternative investment market.
According to a study from Wilshire Associates, the number of BDCs has increased at an annualized pace of 13% over the past five years, and in terms of market value, the BDC industry has increased at an annualized pace of 38% over that same time. In recognition of this growth, Wilshire Associates, the firm behind the popular Wilshire 5000 Index, has developed a new benchmark aimed at measuring the performance of debt-focused BDCs: The Wilshire BDC Index.
“The Wilshire BDC Index provides a highly compelling measurement because it focuses on the performance of debt specialty firms that bridge the gap between equity and high yield private debt,” said Robert Waid, managing director of Wilshire Analytics, in a statement earlier this month. Mr. Waid also noted that the BDC market “has often delivered yields several hundred basis points higher than REITs, utilities, and MLPs.”
As of December 31, 2014, the top five holdings in the Wilshire BDC Index were:
- Ares Capital (ARCC), representing 23% of the index;
- Prospect Capital (PSEC), 14%;
- Apollo Investment (AINV), 8%;
- Main Street Capital (MAIN), 7%; and
- Fifth Street Finance (FSC), 6%.
Combined, these holdings represented 58% of the index’s total, and there were 26 additional holdings constituting the remainder. All components had market capitalizations of at least $100 million as of the time of their addition to the index. The holdings are “float-adjusted capitalization-weighted” and rebalanced quarterly.
“We are thrilled to introduce an index that tracks this specific component of the BDC market,” Mr. Waid said. “Investors have been chasing yields in bonds and bank loans, as well as tax-advantaged equities, and the Wilshire BDC Index measures performance for investment instruments that seek to combine the best of both asset classes.”
For more information, download a pdf copy of the index’s fact sheet.