Why BDCs need outsourcing solutions
Posted by Louie Drake on Monday, April 4, 2016 Under: Business
Following the economic crisis, the financial sector is now seeing the rapid growth of a relatively new market: that of business development companies or BDCs. BDCs refer to companies whose business model focuses on finding promising private small and medium-sized enterprises that are deserving of their investment.
In pouring money into these companies, BDCs hope to acquire a fair amount of shares, and gaining a considerable management power in the process. As RICs or Regulated Investment Companies, BDCs are entitled to special tax privileges, so long as they distribute most of their taxable income to shareholders (at least 90%), and invest not more than 5% in a single security. Moreover, they are entitled to high-risk loans while enjoying less regulation, unlike banks.
To easily adapt to the developments in their ever-growing industry – figures reveal a rise of over $12 billion BDC assets from 2014 to 2015 – BDCs need the assistance of select fund administrators who possess thorough knowledge of this emerging domain’s intricacies. Among the areas in which BDCs stand to benefit from asset servicing firms are accounting, financial reporting, compliance, tax, governance, and treasury.
This need for outsourcing the more tedious aspects of a company’s day-to-day operations is best understood taking into account the context in which BDCs play: They aim to make the most of their investments, while operating on a lean system. If their ultimate goal is to turn every fund into high-yield ones, they need to be able to delegate the rigorous administrative functions to a third party, and focus on making high-level, strategic decisions.
Truly, with the help of asset servicing firms, BDCs can ensure that the procedures leading up to their IPO launch go smoothly, adhering to industry regulations, also addressing the rapidly changing needs of the market. This becomes particularly timely as the BDCs are now drawing the attention of activists who are looking more closely than ever at their operations especially their fees, which are often compared to those of hedge funds.
Most importantly, tapping the assistance of a third party allows business development companies to make good on their promises of high investment yields to their client investors – way after the IPO. Good asset servicing firms help BDCs formulate a sound strategy and build a solid network, compose disclosure agreements, institutionalize compliance practices within their organization, and also navigate the complex laws that cover the operations of all entities in the investment sector.
In pouring money into these companies, BDCs hope to acquire a fair amount of shares, and gaining a considerable management power in the process. As RICs or Regulated Investment Companies, BDCs are entitled to special tax privileges, so long as they distribute most of their taxable income to shareholders (at least 90%), and invest not more than 5% in a single security. Moreover, they are entitled to high-risk loans while enjoying less regulation, unlike banks.
To easily adapt to the developments in their ever-growing industry – figures reveal a rise of over $12 billion BDC assets from 2014 to 2015 – BDCs need the assistance of select fund administrators who possess thorough knowledge of this emerging domain’s intricacies. Among the areas in which BDCs stand to benefit from asset servicing firms are accounting, financial reporting, compliance, tax, governance, and treasury.
This need for outsourcing the more tedious aspects of a company’s day-to-day operations is best understood taking into account the context in which BDCs play: They aim to make the most of their investments, while operating on a lean system. If their ultimate goal is to turn every fund into high-yield ones, they need to be able to delegate the rigorous administrative functions to a third party, and focus on making high-level, strategic decisions.
Truly, with the help of asset servicing firms, BDCs can ensure that the procedures leading up to their IPO launch go smoothly, adhering to industry regulations, also addressing the rapidly changing needs of the market. This becomes particularly timely as the BDCs are now drawing the attention of activists who are looking more closely than ever at their operations especially their fees, which are often compared to those of hedge funds.
Most importantly, tapping the assistance of a third party allows business development companies to make good on their promises of high investment yields to their client investors – way after the IPO. Good asset servicing firms help BDCs formulate a sound strategy and build a solid network, compose disclosure agreements, institutionalize compliance practices within their organization, and also navigate the complex laws that cover the operations of all entities in the investment sector.
In : Business
