On September 30, 2026, one share of Ares Capital, the largest business development company on a US stock exchange, closed at 19.10 dollars. Behind it sat about 40 dollars of loans and other investments, 21 dollars of borrowed money and 19.31 dollars of net assets. Over the first nine months of 2026 the company earned 1.51 dollars a share of net investment income, paid 1.44 dollars in dividends and lost 70 cents a share on the value of its loans.
A buyer of that share owns part of a leveraged lender to midsize American companies. What that lender may buy, how much it may borrow, how much income it must pay out and when it may sell new shares were all set by a law passed in 1980.
A business development company (BDC) is a closed-end investment company that has elected to be regulated under sections 55 to 65 of the Investment Company Act of 1940, keeps at least 70% of its assets in private or small US companies, and usually pays out at least 90% of its taxable income so that it owes no corporate income tax.
More than 170 BDCs held 552 billion dollars of investments in 10,742 companies at the end of the first quarter of 2026. New first-lien loans that quarter carried a median coupon of SOFR plus 4.75 percentage points.
What the 1980 law requires of a BDC
The BDC was created by the Small Business Investment Incentive Act of 1980, signed on October 21, 1980, to give small and growing companies a source of capital through funds that could sell shares to the public. It amended the Investment Company Act, and its conditions still define the vehicle.
- The 70% test
- A BDC may buy other assets only while at least 70% of its total assets, leaving out cash and government securities, sit in qualifying investments, mostly securities bought in private deals from eligible portfolio companies (section 55). An eligible company is a US business that is not itself a fund and either has no securities that brokers can lend against or, under Rule 2a-46, is listed with less than 250 million dollars of equity market value. The remaining 30% is outside the test.
- Managerial assistance
- The definition in section 2(a)(48) requires a BDC to make available significant managerial assistance to the companies it counts toward the 70%, meaning guidance on their management, operations or business objectives.
- Governance
- A majority of the directors must be independent (section 56), and deals between the BDC and its affiliates are restricted (section 57). BDCs file 10-Q and 10-K reports like any listed company, and the board oversees the fair value of every holding, with a written report at least each quarter when it delegates the work (Rule 2a-5).
- A share of the gains for the manager
- The 1980 law also amended section 205 of the Investment Advisers Act, which generally bars advisers from taking a share of a client's capital gains. The adviser of a BDC may take up to 20% of realized capital gains, net of realized losses and unrealized depreciation.
The 90% payout rule
Most BDCs elect to be taxed as regulated investment companies, the status mutual funds use. A regulated investment company owes no corporate tax on the income it pays out, provided it distributes at least 90% of its investment company taxable income each year. A separate 4% excise tax applies to any shortfall below 98% of the calendar year's ordinary income and 98.2% of its capital gains.
A bank grows its loan book by keeping part of its profits. A BDC keeps almost none, so it grows only by borrowing more or by selling new shares, and the Investment Company Act limits both.
The payout follows earnings, and some BDCs split it in two. Main Street Capital pays a regular dividend every month and declares supplemental dividends on top, such as the 30 cents a share it paid in September 2026.
How much a BDC can borrow
The limit is expressed as asset coverage: total assets, minus liabilities other than borrowings, divided by borrowings. From 1980 to 2018 a BDC needed asset coverage of 200%, which holds debt to one dollar per dollar of equity. The Small Business Credit Availability Act, enacted in March 2018 inside a spending bill, cut the minimum to 150%, which allows two dollars of debt per dollar of equity.
A BDC has to adopt the lower limit, in one of two ways:
- By the board. A majority of the independent directors approves it, and it takes effect one year later.
- By the shareholders. More than half of the votes cast at a meeting with a quorum approve it, and it takes effect the next day.
A BDC without a stock market listing must also offer to buy back the shares held on the approval date, 25% of them in each of the next four quarters. Ares Capital adopted the 150% limit effective June 21, 2019, and its adviser cut the base fee on assets financed with debt above one times equity from 1.5% to 1.0%.
Industry debt to equity rose from 0.93 times in 2020 to 1.09 times at the end of 2022, then eased to 0.96 times in the first quarter of 2026. Ares Capital stood at 1.08 times at the end of September 2026, with asset coverage of 188%.
The same 188% stopped Allied Capital's dividend in 2008. Under the 200% rule then in force, Allied could not declare dividends or buy back its shares once its asset coverage fell to 188% at the end of that year. Its shares closed 2008 at 2.69 dollars against a net asset value of 9.62 dollars, so raising equity would have meant selling shares at 28% of their asset value. Allied used cash and asset sales to repay 186 million dollars of debt in the fourth quarter, and in April 2010 Ares Capital bought it for 0.325 Ares shares per Allied share.
Where the dividend comes from: Ares Capital's 2026 accounts
The financial highlights in a BDC's quarterly report put every cost on the same base, the shareholders' net assets. Here are Ares Capital's for the first nine months of 2026, annualized.
| Line | Share of average net assets |
|---|---|
| Base management fee | 3.14% |
| Income and capital gains incentive fees | 1.61% |
| Interest and credit facility fees | 6.17% |
| Other operating expenses | 0.40% |
| Total operating expenses | 11.32% |
| Net investment income | 10.31% |
Source: Ares Capital, Form 10-Q for the quarter ended September 30, 2026, financial highlights.
Investment income came to about 21.6% of net assets: the 11.32% of costs plus the 10.31% left over. The portfolio yielded 9.5% at amortized cost, and the gap comes from leverage. Each dollar of shareholders' money supports about two dollars of loans, and the borrowed dollar costs less than the loan it funds.
Ares Capital's adviser charges a base fee of 1.5% a year on total assets excluding cash, and 1.0% on the part financed with debt above one times equity. Because borrowed assets count too, the fee came to 3.14% of the shareholders' own capital.
The income fee is paid quarterly. Nothing is due until pre-incentive net investment income reaches 1.75% of net assets in the quarter, 7% a year. Between 1.75% and 2.1875% the adviser takes all of it, a catch-up, and above 2.1875% it takes 20% of the whole amount. Capital losses do not enter that calculation, so the fee is paid even in a quarter when the loans lose value. A second fee takes 20% of cumulative realized gains net of losses and unrealized depreciation, and none was owed for the first nine months of 2026.
Credit losses come after net investment income and come out of net asset value. Net realized and unrealized losses were 70 cents a share, so NAV per share fell from 19.94 dollars to 19.31 dollars while the company paid out 95% of its net investment income. Loans on non-accrual, those whose interest is 30 days or more past due or in serious doubt, rose to 2.4% of the portfolio at cost from 1.8% at the end of 2025.
Over the nine months, the total return was 4.20% on net asset value and 1.92% on the share price.
External and internal management
Ares Capital is externally managed: its investment adviser, a subsidiary of Ares Management, runs the portfolio and collects the fees above. Among listed BDCs with net assets above 1 billion dollars, average terms in July 2026 were a 1.30% management fee, an 18.8% incentive fee and a 6.7% hurdle. Those with less than 500 million dollars of net assets averaged 1.66%, 19.6% and 7.4%. Total fees came to 1.67% of average assets at listed BDCs in the first quarter of 2026, and 1.29% at private and non-traded ones.
Some non-traded BDCs charge the base fee on net assets. Blackstone Private Credit Fund charges 1.25% of net assets and 12.5% of income above a 5% annual hurdle.
Other BDCs employ their own managers. Main Street Capital is internally managed, so it pays no advisory fee and carries salaries and bonuses as its own operating costs. In the first half of 2026 its operating costs excluding interest came to 1.21% of average net asset value, about 2.4% a year, with 0.83 dollars of average debt for each dollar of net asset value. The comparable figure at Ares Capital, fees plus other operating costs, was an annualized 5.15% of net assets.
Listed, non-traded and private BDCs compared
The same rules apply to three ways of selling BDC shares. At the end of 2024 there were 50 listed BDCs with 159 billion dollars of assets, 47 non-traded BDCs with 205 billion dollars and 59 private BDCs with 69 billion dollars. BDCs without a listing held 398 billion dollars of investments in the first quarter of 2026, about 72% of the total, against 21 billion dollars in 2020.
| Feature | Listed BDC | Non-traded BDC | Private BDC |
|---|---|---|---|
| How shares are sold | On a stock exchange | Continuous public offering through brokers and advisers | Private placement, with commitments called as loans are made |
| Who can buy | Anyone with a brokerage account | Investors who meet the fund's income and net worth standards | Accredited investors |
| Price paid | Market price, often away from NAV | Monthly NAV | At least NAV at each capital call |
| Way out | Sell on any trading day | Quarterly repurchase offers, usually capped at 5% of shares | A listing, a merger or the end of the fund's life |
| Example | Ares Capital, Main Street Capital | Blackstone Private Credit Fund | Muzinich BDC |
Non-traded BDCs sell several share classes. At Blackstone Private Credit Fund, selling agents may charge up to 3.5% of NAV upfront on Class S shares and 1.5% on Class D shares, and the fund pays a yearly servicing fee of 0.85% of NAV on Class S and 0.25% on Class D. Class I shares carry neither charge. How the 5% quarterly cap rations repurchase requests, and how Blue Owl's OBDC II stopped redemptions, are covered in our guides to private credit and to investing in hedge funds with little money.
Holders of non-traded BDCs redeemed 12.7 billion dollars of shares in the first half of 2026. Sales in the second quarter fell to 2 billion dollars, 82% below a year earlier and the lowest quarter since the end of 2020. Most funds paid out up to their 5% caps, and 9.6 billion dollars of requests were left waiting.
Blackstone Private Credit Fund's total assets fell from 86.0 billion dollars at the end of 2025 to 81.3 billion dollars at the end of June 2026, and its NAV per share from 24.79 dollars to 23.65 dollars.
Why most listed BDCs trade below net asset value
A listed BDC reports net asset value once a quarter, and its shares trade every day. In October 2026 the 47 listed BDCs traded at 0.74 times net asset value on average. Main Street Capital stood at 1.65 times, Ares Capital at 0.99 times, FS KKR Capital at 0.61 times and Prospect Capital at 0.28 times.
Three facts weigh on the price:
- The marks are quarterly estimates. Most BDC loans have no market price. The board, or a valuation designee it oversees, sets their fair value under Rule 2a-5, and the share price moves before the next mark does.
- Index funds sold their BDC shares in 2014. A fund that owns BDC shares must add the BDCs' own costs to its expense ratio as acquired fund fees and expenses, under a rule adopted in 2006. To keep those costs out of index funds, S&P removed Apollo Investment and Prospect Capital from its indices effective February 28, 2014, and Russell dropped 32 BDCs at its June 2014 reconstitution. Median mutual fund ownership of the BDCs removed from the Russell 2500 fell from between 8% and 15% of shares to between 3% and 7%.
- Non-accruals are rising. The non-accrual rate on first-lien loans held by BDCs was 1.8% in the first quarter of 2026, up 0.53 percentage points in one quarter.
Under section 63 of the Investment Company Act, a BDC may sell new common shares below net asset value only if a majority of its shareholders, and a majority of its unaffiliated shareholders, approved the practice within the previous year. Each share sold that way lowers NAV per share for existing holders. Non-traded BDCs sell at NAV, and most new BDC capital in recent years has gone to them and to private BDCs.
A premium works the other way. Main Street Capital's shares closed June 2026 at 51.88 dollars against a NAV of 33.92 dollars, and selling new shares above NAV added 64 cents to its NAV per share in the first half of 2026.
The ten largest BDCs in 2026
Six of the ten largest BDCs have no stock market listing. Ranked by total assets on their June 30, 2026 balance sheets:
| BDC | Type | Total assets, billion dollars |
|---|---|---|
| Blackstone Private Credit Fund | Non-traded | 81.3 |
| Blue Owl Credit Income Corp. | Non-traded | 36.8 |
| Ares Capital (ARCC) | Listed, Nasdaq | 30.5 |
| Apollo Debt Solutions BDC | Non-traded | 27.9 |
| HPS Corporate Lending Fund | Non-traded | 25.2 |
| Ares Strategic Income Fund | Non-traded | 23.0 |
| Goldman Sachs Private Credit Corp. | Non-traded | 18.7 |
| Blue Owl Capital Corp. (OBDC) | Listed, NYSE | 15.4 |
| Blue Owl Technology Finance Corp. (OTF) | Listed, NYSE | 15.1 |
| Blackstone Secured Lending Fund (BXSL) | Listed, NYSE | 13.8 |
The ten largest managers run 60% of all BDC assets. On October 26, 2026, Ares Capital agreed to buy MidCap Financial Investment Corporation for cash and shares valued at about 2.6 billion dollars.
How BDC dividends are taxed
A regulated investment company can pass on the lower qualified dividend rate only for the part of its income that came from qualified dividends it received, and a BDC's income is mostly loan interest. Most BDC dividends are therefore taxed as ordinary income, while distributions of long-term capital gains keep their capital gain rate. BDCs report on Form 1099 like other stocks, instead of the K-1 partnership forms that many private credit funds send.
REIT dividends qualify for a 20% deduction under section 199A, which the 2025 tax law made permanent. BDC dividends do not. The Small Business Investor Tax Parity Act, S. 2962, introduced in the Senate on October 1, 2025, would extend the deduction to BDC interest dividends. Holding BDC shares in an IRA or a 401(k) defers the tax on that income.
Private credit without accredited investor status
Whether accredited status is required depends on the vehicle:
- Listed BDCs and BDC exchange-traded funds. Open to anyone with a brokerage account, for the price of one share.
- Non-traded BDCs. Registered public offerings sold to investors who meet suitability standards on income and net worth, set by the fund and by some states. Our accredited investor guide gives Blackstone Private Credit Fund's thresholds, which sit well below the accredited levels.
- Interval funds. Registered funds that buy back between 5% and 25% of their shares at fixed intervals. Each prospectus sets its own investor requirements, and some funds that hold private loans accept buyers who are not accredited. Our private credit guide covers the repurchase rule.
- Private BDCs and institutional private credit funds. Sold in private placements under Regulation D, normally to accredited investors only. Funds that rely on section 3(c)(7) of the Investment Company Act also require qualified purchasers, which for an individual means at least 5 million dollars of investments.
Frequently asked questions
Are BDCs risky investments?
The risks come from leverage, credit and pricing. A BDC may borrow up to two dollars for every dollar of equity, it lends mostly to midsize private companies, and listed BDC shares can trade far from the value of the assets behind them. Ares Capital's net asset value per share fell 3.2% in the first nine months of 2026 as loans on non-accrual rose to 2.4% of its portfolio at cost, and at the end of 2008 Allied Capital's shares traded at 2.69 dollars against 9.62 dollars of net asset value. This article is general information, not investment advice.
How does a BDC make money?
Mostly from interest on loans to midsize companies, plus fees charged to borrowers and gains on equity stakes. Ares Capital's portfolio yielded 9.5% at amortized cost at the end of September 2026. The BDC pays interest on its own borrowings and fees to its manager, then distributes what is left, its net investment income, as dividends. Ares Capital earned 1.51 dollars a share of net investment income in the first nine months of 2026 and paid 1.44 dollars.
Are BDC dividends qualified dividends?
Mostly not. A regulated investment company can pass on the qualified dividend rate only for the part of its income that came from qualified dividends it received, and a BDC's income is mostly interest on loans. Most BDC dividends are therefore taxed as ordinary income, while distributions of long-term capital gains keep their capital gain rate. BDC dividends also fall outside the 20% section 199A deduction that applies to REIT dividends.
What is the difference between a BDC and a REIT?
Both avoid corporate income tax by paying out at least 90% of their taxable income. A REIT owns real estate or mortgages under the tax code's REIT rules. A BDC lends to and invests in private or small US companies under the Investment Company Act, which caps its borrowing at 150% asset coverage and requires 70% of its assets in qualifying investments. REIT dividends qualify for the 20% section 199A deduction and BDC dividends do not.
Do you need to be an accredited investor to buy a BDC?
Only for a private BDC, which sells its shares in private placements to accredited investors. Listed BDCs trade on stock exchanges and anyone with a brokerage account can buy them. Non-traded BDCs are registered public offerings sold to investors who meet the fund's income and net worth suitability standards, which are lower than the accredited investor thresholds.
What is the largest BDC?
Blackstone Private Credit Fund, a non-traded BDC, with 81.3 billion dollars of total assets at June 30, 2026. The largest listed BDC is Ares Capital, with 30.5 billion dollars at the same date. On October 26, 2026, Ares Capital agreed to buy MidCap Financial Investment Corporation in a cash and stock deal valued at about 2.6 billion dollars.