what is a business development company (bdc)

Confidential © SBD Investment Partners, Inc.

ABC Corporation, Inc.

Becoming a Business Development Company (BDC)

To Fund Future Growth

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Discussion Topics

Attributes of a BDC

BDC Industry Review and Market Receptivity

Funding Options

Engagement Relationship with SBD


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History of the Business Development

Company (BDC)1. Investment Company Act 1940 (the

“1940 Act”), which is the same regulatory framework of mutual funds.

2. BDC was created as part of the Small Business Investment Incentive Act of 1980 (the “1980 Amendments”) as a result of a perceived crisis in the capital markets in the 1970s. (much like happening now)

3. Regulated Investment Company (RIC) Status in 1990.


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What is a BDC?Hybrid between an operating company and an investment company.

Invest primarily in private companies.

Typically a closed-end fund regulated as a 1940 Act company.

Structured as Regulated Investment Company (RIC) for tax purposes.


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Attributes of the BDC to the Investor and Portfolio Companies?

Public company which has:Access to public capital markets

Shares are publicly traded - liquidity

Publicly available audited financial information

Flow-through tax treatment.

Reduced regulatory burden as compared to a 1940 Act Company

Restrictions on leverage/affiliated transactions

Hybrid between an operating company and an investment company.

No audit requirements for portfolio companies.

Portfolio is typically diversified which reduces risk to investors compared to a single private equity investment.


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How and what do BDC’s invest?

Typically - small to middle-market private companies

Entire spectrum of financial instruments:Equities (preferred stock, common stock, debentures, PIPE’s)

Commercial style debt

Services subsidiary originates financial services for the BDC that will be in the form of:

Commercial debt

Due diligence

Merger and acquisitions (buy and sell side)

Management consulting


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How BDC’s Invest in the Portfolio

Senior Secured Debt

Common Equity

Preferred Equity

Mezzanine Debt & Warrants

Second Lien Secured Debt

Higher

Lower


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Becoming a BDC?Be publically listed on one of the exchanges:

New York Stock Exchange (NYSE)

Nasdaq Stock Market, Inc. (Nasdaq)

NYSE AMEX

Register a class of securities on Form N-2

Make an election to be a BDC- file a Form N-54A

Comply with the exchange reporting requirements


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BDC Investing Rules?

A BDC must invest at least 70% of its assets in eligible portfolio companies.

Generally:

Organized and principally operating in the United States

Private, or very thinly traded public company

Can’t invest in other BDC’s or insurance companies

Affiliated transactions (highly regulated)

Certain transactions may be prohibited, or require approval of a majority of the Board, or an order from the SEC


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Borrowing Limitations?

BDC’s can have and equal amount of debt to equity to invest .For example:

A BDC with $50 in equity

would be able to invest $100

in growing businesses.

Other investment companies are restricted to 50% debt to equity.

$25Debt$50

Equity

$50Equit

y

$50Debt$50

Equity

$50Equit

y


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BDC’s Operational Requirements

Must have a majority of independent directors - persons who are not “interested persons.”

Must make available significant managerial assistance to these companies.

Must appoint a Chief Compliance Officer and maintain a comprehensive compliance program.

Custodian Agreement - Must place and maintain its securities and similar investments in the custody of a bank.

Fidelity Bond - A BDC must provide and maintain a bond issued by a reputable fidelity insurance company to protect the company against larceny and embezzlement. The bond must cover each officer and employee with access to securities and funds of the company.


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SEC Reporting Requirements?

Form 10-K (Annual Report)

Form 10-Q (Quarterly Report)

Form 8-K (Current Report)

Proxy Statements

Comply with the Sarbanes-Oxley Act of 2002

Must comply with the corporate governance of the exchange you are listed.


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How Are BDC Assets Valued?

Each asset must be valued on a quarterly basis (i.e., “mark-to-market”)

Market value is used for those assets for which market quotations are readily available“Fair value,” as determined by the board of directors, is used for other securities and assets

Portfolio assets of intellectual property and patents which can not be recognize by the portfolio companies can be recognized on the BDC’s balance sheet

There is no single standard for determining fair value

Determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process.


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How are BDC’s Managed?

Internally managed or,

Externally managed


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How Can an Internally Managed BDC Compensate

Management?Certain performance-based compensation permitted, including:

Issuance of at-the-market options, warrants, or rights pursuant to an executive compensation planMaintenance of a profit sharing plan.

Otherwise, BDC must use cash assets as compensation

Restricted stock – some exceptions


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How Can an Externally Managed BDC

Compensate the Advisor?The investment advisor must be

registered under the Investment Advisors Act of 1940

The Advisors Act contains no prohibition against an advisor taking an incentive fee against income, although the market has effectively capped these fees at 20%, usually subject to a hurdle.


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How are BDC’s Taxed?

Allows “pass through” tax treatment for income and capital gains that are distributed to shareholders.

Must distribute at least 90% of its investment income to shareholders annually

May retain, distribute or “deem distribute” capital gains.

Gains in asset appreciation is recognized when the asset is sold.


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BDC Industry Review and Market Receptivity


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BDC Market ActivityWells Fargo created a BDC

Index of “27” BDC’s in April 2011

Market Cap $15 Billion

Average stock price = $9.78

Average dividend = 5.78%

Registrations in 2010 = $5.1B

6 IPO’s in 2010 = $513M

In 2010 8 BDC’s did $1.2B in secondary's

There are ~ 63 BDC’s 0f which 39 are “active”


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Recent Industry TrendsStock is valued against NAV or Book Value plus a premium for dividends

The BDC model has proven to be resilient - 2010 and 2011 have been years of recovery:

Resumption of dividend payments;

Increase in repurchase programs;

Lower asset coverage ratios.

Of the top 27 actively traded BDC’s10 are currently trading above NAV/Share

3 are trading between 90% - 99% of NAV/Share


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Options to Finance Growth


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Financing Assumptions

ABC needs interim funding (mezzanine) of $15,000,000 to carry out the current operational plans to be used as follows:

$5,500,000 for Phase II to retrofit a production facility;

$4,500,000 for working capital and

$5,000,000 for new projects.

Shareholders would like to see a liquidity event or have the ability to be liquid in 18 to 24 months.

Additional capital to expand the growth of the company.

Capital available to fund a technology incubator to remain at the forefront of the technology.


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Two Options

Preferable option is to acquire a public company

Option Time to Capital

Acquire a Public Company

9-18 Months

File an S-1 (IPO) 18-24 Months


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ABC Entity Chart


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Advisor ServicesThis subsidiary will be responsible for providing support services to portfolio companies as well as to commercial clients that are not part of the BDC. It originates business in the form of:

Merger and AcquisitionBuy SideSell Side

Due DiligenceManagement ConsultingCommercial Finance


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Pro-forma Capital Table

ABC Shares 10,000,000Acquisition Share 541,125

Total Shares Outstanding 10,541,125

IP and other Values $30,000,000

Core operations $20,000,000

Pro Forma market capitalization $50,000,000

Pro Forma Share Price Range $4.74

Use of proceeds of a $100M offeringAcquisition creditors $500,000

Placement costs $4,500,000

Debt Reduction (mezzanine) $17,500,000

Investment Capital $77,500,000

Total $100,000,000


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Time Line


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Post Offering Ownership

Entity Shares % Market Value

ABC Shareholders 10,000,000 49% $93,700,000

Acquisition Shareholders 541,125 2% $5,100,000

IPO Shareholders 10,000,000 49% $93,700,000

Total 20,541,125 100% $192,500,000

IPO Share Price $10.00/share

Post IPO share price

Book Value/Asset Value $192,500,000

Shares in the market 20,541,125

Post IPO Share Price $9.37/share


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Future

2012 2013 2014 2015

ABC Revenue $85,000,000

$177,000,000

$345,000,000

$531,000,000

Net Income $2,000,000 $11,000,000

$18,000,000 $26,000,000

BDC Book Value

$50,000,000

$145,000,000

$245,000,000

$325,000,000

Shares Out 10,500,000 10,500,000 20,500,000 20,500,000

Share Price $4.80 $13.80 $12.00 $13.50

Dividends Paid

$1,800,000 $5,200,000 $17,000,000 $22,100,000


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SBD Investment Partners, Inc.5815 Guenevere Ct.

Saint Cloud, FL 34772

www.sbdip.com

Roy Salisbury207.553.0086

rsalisbury@ sbdip.com

Doug Calaway907.227.5633

[email protected]

http://www.sbdip.com/


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SourcesSeeking Alpha

Sutherlin, Ashbill

Yahoo Finance

John Dresher “Stock Strategies”

REISA Conference

McGladrey

what is a business development company (bdc)

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