BDCs grant public investors access to private companies.

What is a BDC?
A BDC is a category of investment company created by Congress in 1980 under the Investment Company Act of 1940 to facilitate the flow of capital to private companies. A BDC provides investors with exposure to the private equity and private debt investment markets, which typically have been dominated by institutional investors, such as pension funds and endowments. These investors have been able to meet the high minimum requirements imposed by private equity firms and private debt investment funds, and have had specialized investment expertise at hand to evaluate these types of investments. We believe that institutional investors participate in these funds for a number of reasons, including their use as a potential source of risk diversification within a portfolio and for their return potential over the long term.

Where does a BDC fit into an investment portfolio?
Alternative investments, such as private equity and private debt, have become commonplace among institutional investors for their ability to provide diversification and their return potential. Further, alternative assets tend to be less efficiently priced than traditional securities, which provides an opportunity to earn higher portfolio returns through active management.

FSIC provides an opportunity for investors to access the diversification benefits and return potential of alternative assets such as senior secured loans of U.S. corporate issuers.

Is a non-traded BDC similar to a non-traded Real Estate Investment Trust (REIT)?
A BDC is a pooled investment vehicle that invests in equity or debt of private companies whereas a REIT invests in real estate. Nonetheless, a REIT and a BDC share many characteristics. From a regulatory standpoint, they both must file periodic SEC reports such as Forms 10-K and 10-Q, and comply with the Sarbanes-Oxley Act of 2002. Non-traded varieties are also both subject to state and NASAA regulations.

From a tax perspective, most BDCs and REITs are structured to provide tax-advantaged, pass-through treatment of ordinary income and long-term capital gains directly to stockholders. No corporate tax is paid if at least 90% of taxable income is distributed in a timely manner and applicable tax rules are complied with. In addition, a BDC is a highly accountable and transparent form of investment. It is required to place assets with a qualified independent custodian—employees and managers do not handle company funds.

Finally, both BDCs and REITs are governed by an Independent Board of Directors to ensure the proper alignment of interests. We list these and other characteristics shared by both non-listed structures in the table below.

Non-traded BDCs and REITs
Share Characteristics		 BDC* REIT
Underlying Investments Priv. Eq. or Debt Real Estate
SEC Registered Yes Yes
Standard SEC Financial Reporting (10-K, 10-Q) Yes Yes
May Be Externally Advised Yes Yes
Subject to state and NASAA regulations Yes Yes
Distribute 90% of income to avoid corporate tax Yes Yes
Must meet various "asset" and "income" tests Yes Yes
Must comply with Sarbanes-Oxley Yes Yes
Exit strategy: liquidate portfolio, list company or merge Yes Yes
* The table assumes that the non-listed BDC elects to be treated as a RIC for tax purposes.

There is one important difference, however. Unlike REITs, BDCs are restricted in the amount of leverage they can employ to 50% of the BDC’s asset value. REITs, which are not governed by the Investment Company Act of 1940 as BDCs are, may employ substantially more leverage than BDCs.