BDCs: An Alternative Way to Access the Benefits of Private Credit
April 22, 2024
Read Time 3 MIN
Demand for private credit is surging. The market size has nearly doubled since 2020, reaching an estimated $1.4 trillion in early 2023.1 This growth is expected to continue, with projections suggesting it could hit $2.3 trillion by 2027.2
For investors, private credit offers the potential for higher yields and diversification. Meanwhile, corporate borrowers value the flexibility and speed offered by private lenders compared to traditional banks, many of which have pulled back lending in this space.
Private Credit Becomes More Entrenched as Banks Retreat from Middle Market Lending
The 2023 regional banking crisis accelerated the pre-existing trend of banks retreating from lending to private companies that tend to be below investment grade or not rated. This void is being filled by private credit. Unlike banks, which are subject to stricter regulations and capital requirements, private lenders offer more flexibility and can tailor loan structures to meet the specific needs of borrowers. This flexibility, coupled with their increasing pool of capital positions private credit as a crucial source of financing, particularly for businesses that may not meet the stricter criteria of traditional banks.
There’s Just One Problem: Traditional Private Credit is Illiquid
Traditional private credit investments, while offering the potential for attractive returns and yield, come with a drawback: illiquidity. Unlike publicly traded stocks or bonds, these investments often involve long lock-up periods, typically several years. This means your money is tied up for the duration, inaccessible for immediate needs or strategic portfolio adjustments. This inflexibility can be a major hurdle for investors who require more dynamic access to their capital, especially in a market rife with uncertainties. In an environment where liquidity is highly prized, Business Development Companies (BDCs) present a compelling, liquid alternative to traditional private credit strategies.
BDCs: A Liquid Alternative in Private Credit
BDCs bridge the gap between traditional private credit and publicly traded securities. BDCs offer the same benefits as traditional private credit strategies – the potential for higher yields and diversification away from traditional stocks and bonds – but in a much more liquid form.
BDCs Offer Attractive Relative Yield
Source: Factset. Past performance is no guarantee of future results. BDCs represented by MVIS US Business Development Companies Index; U.S. HY Bonds represented by ICE BofA US High Yield Index; REITs represented by FTSE NAREIT Equity REITs Index; Utilities represented by Standard & Poor’s 500 Utilities Index; U.S. Stocks represented by Standard & Poor’s 500 Index; U.S. IG Bonds represented by Bloomberg Barclays US Aggregate Bond Index; U.S. 10 Yr Treasury represented by ICE BofA Current 10-Year US Treasury Index.
Since BDCs are publicly traded on exchanges, investors can buy and sell shares daily, providing the flexibility to adjust their holdings as needed. This makes BDCs a compelling option for investors seeking exposure to the private credit market without sacrificing the ability to access their capital when necessary. It is important to note though, that because of their daily liquidity, publicly traded BDCs can exhibit greater short-term volatility relative to traditional private credit funds which tend to have lower liquidity and lack price discovery.
BIZD | VanEck BDC Income ETF
The Complexity of BDC Investments and the Role of BIZD
Like the broader private credit space, the market capitalization of the public BDC universe has grown substantially over the past several years.
Increasing Demand for BDCs
Source: FactSet. BDCs represented by MVIS US Business Development Companies Index (MVBDCTRG); Index data prior to June 19, 2023 reflects that of the MVIS US Business Development Companies Index (MVBIZDTG). From June 19, 2023 forward, the index data reflects that of the MVIS US Business Development Companies Index (MVBDCTRG). Index history which includes periods prior to June 19, 2023 links the performance of MVBIZDTG and MVBDCTRG and is not intended for third party use. Past performance is no guarantee of future results.
Today, there are many publicly traded BDCs available, each with distinct risk profiles based on their asset structures, sector and credit exposures, financing terms and management quality. Investing in individual BDCs demands rigorous research to fully understand each entity.
This is where the VanEck BDC Income ETF (BIZD) comes in. BIZD offers broad market exposure to publicly traded U.S. business development companies and may be appealing for investors seeking a liquid alternative to private credit funds. BIZD seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® US Business Development Companies Index, which tracks the overall performance of publicly traded business development companies.
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IMPORTANT DISCLOSURES
1 Source: Bloomberg, Morgan Stanley, Understanding Private Credit. As of January 2023.
2 Source: Prequin, Morgan Stanley, Understanding Private Credit. As of January 2023.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.
Business Development Companies (BDCs) generally invest in less mature U.S. private companies or thinly traded U.S. public companies which involve greater risk than well-established publicly-traded companies. While the BDCs that comprise the Index are expected to generate income in the form of dividends, certain BDCs during certain periods of time may not generate such income. The Fund will indirectly bear its proportionate share of any management fees and other operating expenses incurred by the BDCs and of any performance-based or incentive fees payable by the BDCs in which it invests, in addition to the expenses paid by the Fund. A BDC’s incentive fee may be very high, vary from year to year and be payable even if the value of the BDC’s portfolio declines in a given time period. Incentive fees may create an incentive for a BDC’s manager to make investments that are risky or more speculative than would be the case in the absence of such compensation arrangements, and may also encourage the BDC’s manager to use leverage to increase the return on the BDC’s investments. The use of leverage by BDCs magnifies gains and losses on amounts invested and increases the risks associated with investing in BDCs. A BDC may make investments with a larger amount of risk of volatility and loss of principal than other investment options and may also be highly speculative and aggressive. The Fund and its affiliates may not own in excess of 25% of a BDC's outstanding voting securities which may limit the Fund's ability to fully replicate its index. An investment in the Fund may be subject to risks which include, among others, investing in BDCs, investment restrictions, financial sector, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, issuer-specific changes, and index-related concentration risks, all of which may adversely affect the fund. Small- and medium-capitalization companies may be subject to elevated risks.
MVIS US Business Development Companies Index is a rules-based index intended to track the overall performance of Business Development Companies (BDC).
ICE BofA US High Yield Index tracks the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating.
FTSE NAREIT Equity REITs Index is a broad-based, free-float adjusted market capitalization weighted index consisting of equity real estate investment trusts.
Standard & Poor’s 500 Utilities Index comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.
Standard & Poor’s 500 Index tracks the 500 of the largest companies listed on stock exchanges in the United States.
Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, commercial mortgage-backed securities.
ICE BofA Current 10-Year US Treasury Index is a one-security index comprised of the most recently issued 10-year U.S. Treasury bond.
MVIS US Business Development Companies Index is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of Van Eck Securities Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MarketVector Indexes GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck BDC Income ETF is not sponsored, endorsed, sold or promoted by MarketVector Indexes GmbH and MarketVector Indexes GmbH makes no representation regarding the advisability of investing in the Fund.
The Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
666 Third Avenue | New York, NY 10017
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IMPORTANT DISCLOSURES
1 Source: Bloomberg, Morgan Stanley, Understanding Private Credit. As of January 2023.
2 Source: Prequin, Morgan Stanley, Understanding Private Credit. As of January 2023.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.
Business Development Companies (BDCs) generally invest in less mature U.S. private companies or thinly traded U.S. public companies which involve greater risk than well-established publicly-traded companies. While the BDCs that comprise the Index are expected to generate income in the form of dividends, certain BDCs during certain periods of time may not generate such income. The Fund will indirectly bear its proportionate share of any management fees and other operating expenses incurred by the BDCs and of any performance-based or incentive fees payable by the BDCs in which it invests, in addition to the expenses paid by the Fund. A BDC’s incentive fee may be very high, vary from year to year and be payable even if the value of the BDC’s portfolio declines in a given time period. Incentive fees may create an incentive for a BDC’s manager to make investments that are risky or more speculative than would be the case in the absence of such compensation arrangements, and may also encourage the BDC’s manager to use leverage to increase the return on the BDC’s investments. The use of leverage by BDCs magnifies gains and losses on amounts invested and increases the risks associated with investing in BDCs. A BDC may make investments with a larger amount of risk of volatility and loss of principal than other investment options and may also be highly speculative and aggressive. The Fund and its affiliates may not own in excess of 25% of a BDC's outstanding voting securities which may limit the Fund's ability to fully replicate its index. An investment in the Fund may be subject to risks which include, among others, investing in BDCs, investment restrictions, financial sector, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, issuer-specific changes, and index-related concentration risks, all of which may adversely affect the fund. Small- and medium-capitalization companies may be subject to elevated risks.
MVIS US Business Development Companies Index is a rules-based index intended to track the overall performance of Business Development Companies (BDC).
ICE BofA US High Yield Index tracks the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating.
FTSE NAREIT Equity REITs Index is a broad-based, free-float adjusted market capitalization weighted index consisting of equity real estate investment trusts.
Standard & Poor’s 500 Utilities Index comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.
Standard & Poor’s 500 Index tracks the 500 of the largest companies listed on stock exchanges in the United States.
Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, commercial mortgage-backed securities.
ICE BofA Current 10-Year US Treasury Index is a one-security index comprised of the most recently issued 10-year U.S. Treasury bond.
MVIS US Business Development Companies Index is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of Van Eck Securities Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MarketVector Indexes GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck BDC Income ETF is not sponsored, endorsed, sold or promoted by MarketVector Indexes GmbH and MarketVector Indexes GmbH makes no representation regarding the advisability of investing in the Fund.
The Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
666 Third Avenue | New York, NY 10017