Why Congress created the Business Development Company ("BDC") for you?

Business Development Company History

Congress enacted the Small Business Investment Incentive Act in 1980 which created the structure for Business Development Companies (“BDC”) from the initial provisions of the Investment Company Act of 1940.

A BDC as closed end mutual funds designed to create investment in the stock of private owned portfolio companies and undervalued public portfolio companies. A portfolio company is one in which the BDC has invested time and money in addition to facilitating investment from other related and independent sources. This investment in the portfolio company could be equity, convertible debt for bridge loans and hybrid like preferred stock to assist the growth of a client portfolio company. Congress also required that substantial management support be offered by the BDC on a fair fee basis to a portfolio company in which the BDC has facilitated investment. This support is intended to increase the investment return and mitigate the risk to investors. This in turn should provide the portfolio company with maximum opportunities for capital with reasonable terms.

Incentive for Business Development Company Performance

Investment of time, money and other resources by the BDC in a Portfolio Company is made to increase the amount and certainty of the return on the BDC and other investor capital.

Investors in a portfolio company including the BDC expect the management of a portfolio company to grow their business and then spin-out their company from the BDC as a successful public company. Some of the portfolio company shares held by the BDC are dividend out to the BDC shareholders by the BDC. The shares retained by the BDC as a registered mutual fund are used to build the value and expand the capabilities of the BDC to invest further.

The BDC may retain from 10% to 50% of the shares acquired from a portfolio companies as part of its stock portfolio. Multiple investments by the BDC in different portfolio companies will provide diversification for the investors.

The amount of ownership acquired in any portfolio company by the BDC can vary from a minority interest of 10% to total acquisition of 100% of the portfolio company. However, it is expected that a minority interest will be more typical.

Bridge loan capital advances will be provided on a staged basis to match the need and the ability of the portfolio Company to manage new investment.

The BDC will continue to mentor the portfolio company throughout the investment period and assist in the achievement of both business and financial goals

“Going Public” by “Spinning off” a Private Portfolio Company

The BDC is a superior alternative strategy for a private portfolio company to use to become a public stock company Our BDC will acquire an portfolio ownership interest in a private company that “should” be public as demonstrated by their business model, management, success and other key factors that will drive exceptional growth.

Once involved in an ownership position, our BDC will mentor the portfolio company on the necessary activities that portfolio must take to be prepared and be attractive for the public stock market. These activities include but are not complete for complying with regulations such as Sarbanes Oxley, adjusting the company’s capital structure of selected debt and equity, distribution of shares to the BDC shareholder base to create shareholders for the portfolio company, file the necessary SEC documents such as SB-2 and then arrange for listing on a market with the NASD.

The BDC process allows the private portfolio company to avoid the cost, delays, and negative image along with new Government regulations for “reverse mergers. Also, the BDC process allows for a reduction of the investment banking cost of a traditional Initial Public Offering if an IPO is at all possible for a smaller company in the current financial market.

Support from Private Equity Firm Partners

Since raising capital is one of the main goals of the portfolio company, BDC investments in a portfolio company will also be supported by our Private Equity Firm partners. Both affiliated funds such as the Morris Capital Fund I and non-affiliated funds may participate in funding the portfolio growth through the mentoring and spin-out process.

Following the spin-out, the portfolio company will probably require a larger amount of capital investment to continue and accelerate growth. With the status of current financial markets, this will probably be done as a PIPE.

A PIPE or “Private Investment in Public Equity” will be from institutional investors, hedge funds or a few accredited investors and the PIPE investment is predicated on the portfolio company being a public traded company. Once questions of due diligence and portfolio company valuation after going public are answered, then significant additional capital should become available to the public portfolio company versus a private owned company.

In addition, the value of the portfolio company should be significantly higher as a public versus private stock company due to the increase in the price earnings ratio and the increase in portfolio company earnings. (See section on “Do you want to increase the value of your company by 3 to 5 times.”) This should reduce the percentage amount of the company ownership required to be given up to raise additional capital. It costs a lot less to raise capital and is much more likely to be successful as a public company than as a private company.

Also, earlier investments in the portfolio company by private equity funds should help maintain interest by those and other funds for additional equity investment along with funding other events that increase the value of the portfolio company.

In summary, the creation by Congress of the Business Development Company concept is truly a benefit for growing American business.

Is your public company share value depressed?