Business Development Companies Consider IPOs as Valuations Surge

In recent months, business development companies (BDCs) have witnessed a surge in valuations, prompting several firms to opt for public offerings.

BDCs, which are private lenders that primarily provide loans to small- to medium-sized businesses (SMBs), have experienced a notable increase in public offerings after a two-year lull, Bloomberg reported Thursday (Jan. 18).

Palmer Square Capital BDC went public on Wednesday (Jan. 17), and three other BDCs have filed for public offerings in January, according to the report.

The surge in valuations for BDCs has attracted firms to enter the market, seizing the opportunity to raise capital through public offerings, the report said.

Funds managed by Blue Owl Capital, Churchill Asset Management and Morgan Stanley are also in the queue to go public, per the report. While some are first-time public issuers for BDCs, Blue Owl has previously listed them.

For the past 18 months, BDCs have generally traded at discounts to the net value of their assets, according to the report. However, the recent debt market rally has turned this discount into a slight premium.

James Morrow, founder and CEO of Callodine Capital Management, an investor in public BDCs, told Bloomberg that the current IPO window for BDCs is short, and they are trading close to book value. This trend suggests higher dividend rates in the future and reflects strong investor demand.

While BDCs are initially set up as private vehicles, going public offers several advantages, according to the report. Private BDCs often have a stated time frame to transition to a public entity, and selling shares allows initial investors to cash out. Additionally, going public enables BDCs to attract more investors and raise capital more easily. The recent surge in valuations and improved market conditions have encouraged private BDCs to seize the opportunity to list publicly.

BDCs not only provide loans to small or medium-sized companies but also invest in broadly-syndicated loans and other types of investments, the report said.

One significant advantage of operating as a BDC is the ability to avoid paying corporate-level income taxes, provided certain conditions are met, per the report. BDCs must distribute at least 90% of their taxable income to shareholders, allowing them to benefit from tax advantages.

In another recent development in this space, Wells Fargo and Centerbridge Partners said in September that they were launching a business development company, called Overland Advisors, to provide direct lending solutions to non-sponsor North America middle-market companies.