The appointment of hedge fund veteran Scott Bessent as the likely US Treasury secretary is generating significant enthusiasm in financial markets, particularly for business development companies (BDCs), Forbes reports.
With a track record favoring financial deregulation and increased lending, Bessent’s leadership is expected to create a favorable environment for private equity and BDCs, which lend to small businesses.
BDCs are poised to benefit as they fill the lending gap left by traditional banks. Congress established BDCs in 1980, granting them special tax advantages in exchange for distributing 90% of taxable profits to shareholders as dividends. This structure allows them to offer attractive yields, such as the VanEck BDC Income ETF (BIZD), which currently delivers an 11% dividend yield.
The bullish outlook for BIZD is driven by Bessent’s anticipated policies, which will likely encourage deal-making and mergers and acquisitions (M&A) activity. BIZD offers a diversified investment across 29 BDCs, providing exposure to the broader industry with a relatively low entry cost, making it accessible to everyday investors.
Bessent’s focus on deregulation may increase the flow of capital into private markets, fueling M&A activity and lending. However, this influx of cash could also contribute to persistent inflation. Despite expectations for Federal Reserve rate cuts earlier in the year, rising bond yields suggest that interest rates may remain higher for longer, posing challenges for traditional bond investors but creating opportunities for BDCs.
Since its inception, BIZD has doubled its dividend payout, though it has experienced price volatility. Total returns are up 147% due to its high dividends, but price fluctuations underscore the importance of timing investments. While some BDCs, like Prospect Capital, have underperformed, BIZD mitigates risk by offering diversified exposure.
The US government’s fiscal deficit, projected at $1.9 trillion, further underscores the need for alternative financing solutions, which BDCs provide. With small business financing rebounding and Bessent’s policies likely to support continued growth, BIZD presents an opportunity for investors seeking high yields amid a dynamic economic landscape.
