The word “private” draws investors. It implies an aura of exclusivity; human nature being what it is, the unattainable often lures us in. For many investors, that’s the case with private credit — an asset class defined as non-banking where the issued debt isn’t publicly traded.
It’s illiquid, but potentially lucrative, explaining investors’ interest in it. While private credit isn’t yet accessible to the masses, an alternative is. That option is business development companies (BDCs), which the VanEck BDC Income ETF (NYSEArca: BIZD) taps.
BDCs, including BIZD member firms, extend capital to mid-sized and smaller companies, which traditional banks typically ignore. In some cases, BDCs takes equity in exchange for the loan, but the extended capital is usually a debt-based loan.
BDC Advantages
BDCs and private credit aren’t identical twins, and the former may lack some of the prestige of the latter. However, BDCs and BIZD have some advantages for investors to ponder. For example, BIZD holdings are stocks. This implies a superior level of liquidity relative to what’s seen in the private credit market.
“Established to promote investment in small and mid-sized firms, BDCs open doors to private credit markets. A standout advantage of BDCs is their inherent liquidity,” noted Coulter Regal, VanEck product manager. “Unlike traditional private credit funds, which often have multi-year lockup periods, BDCs are listed on major stock exchanges and can be traded daily. This grants investors the ability to modify their positions in response to market changes, personal financial needs or altered investment tactics.”
Additionally, the loans issued by BDCs often feature a floating rate note component, which reduces interest rate sensitivity. Reduced interest rate sensitivity is a prized commodity among high-yield asset classes. This in part explains why over the past two years, BIZD is higher by 9.2% while the Markit iBoxx USD Liquid High Yield Index is lower by nearly 8%.
BIZD itself offers investors advantages. Namely, it’s an ETF, meaning investors don’t have to scour the wide BDC landscape in an effort to find the right fit — a daunting task to be sure.
“There are many publicly traded BDCs available in the market today, 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. A holistic market approach to BDC investment can offer industry-wide diversification, negating the need for granular BDC assessments,” concluded Regal.
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