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The BDC industry can seem overwhelming. Here are some terms to help you navigate:

Alternative lender:

A provider of specialty financing who fills a void when traditional lenders like banks are unwilling or unable. BDCs are alternative lenders to mid-sized companies, who tend to be overlooked by traditional banks and find it difficult to obtain expansion capital.

Baby bond:

A corporate bond issued in a smaller denomination, and thereby more accessible to the average retail investor.

Business Development Company (BDC):

A company that loans money to and invests in small and medium size businesses. BDCs are not banks; they are regulated investment companies. BDCs were created in 1980 by the U.S. Congress to stimulate lending. What sets BDCs apart is that they enable public investors to invest in private, growing businesses. To qualify as a BDC under the Investment Company Act of 1940, certain requirements must be met with respect to income distribution, diversification, leverage constraints and managerial assistance (see also: Who We Are).

Default risk:

The risk that a company can no longer repay a loan or meet the terms of the loan agreement. To compensate for default risk, lenders typically require rates of return that reflect the borrower’s likelihood of default. The greater the chance of default, the more the lender charges, and vice versa.

Emerging asset class:

A type of investment that has yet to become widely adopted by investors. Industry analysts see parallels between an emerging asset class like BDCs and other investment vehicles—Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs)—which also started out as relatively obscure, niche investments, but are now highly successful, well-established asset classes as a whole.

Middle market:

While definitions vary, Fifth Street generally defines middle market companies as those with $15 – $75 million of earnings before interest, taxes, depreciation and amortization (EBITDA)—a common measure of profitability. Middle market companies are an underserved segment when it comes to financing and often find it difficult to borrow at competitive interest rates.

Master Limited Partnership (MLP):

A publicly-traded limited partnership where investors receive periodic income distributions in exchange for providing capital. To be considered an MLP, at least 90% of the partnership’s cash flows must come from real estate, natural resources and commodities. The BDC structure is often compared to that of an MLP or a REIT (see also Real Estate Investment Trust).

Non-accruing asset:

A loan where the borrower has stopped making the agreed-upon interest payments for an extended time period.


The process of securing sponsor-led private equity opportunities, from sourcing through closing. To find high quality deals, Fifth Street has a dedicated, well-connected team that focuses solely on origination.

Pass through vehicle:

A structure that bypasses corporate income taxes—thus avoiding double taxation—as long as a certain percentage of taxable annual net income is paid out to shareholders. For BDCs, the threshold is 90%, which helps drive high dividend yields to shareholders.

Private company:

A company whose securities are not traded publicly on a listed stock exchange.

Private equity:

Generally speaking, private equity refers to investors and funds that invest directly in private companies or buy public companies in order to take them private. Most private equity capital comes from institutional and accredited investors who can afford to lock-up considerable amounts of money for extended lengths of time. Private equity firms usually make money by growing a company and increasing its valuation, then selling it down the road at a higher price.

Real Estate Investment Trust (REIT):

A publicly-traded security that makes direct investments in real estate. Like BDCs and MLPs, REITs are high-yielding, tax-favored pass through vehicles (see also Master Limited Partnership).

Senior Secured Loans:

Loans at the top of the capital structure, typically “secured,” or backed by a company’s assets. These are generally considered the safest loan category because they have the highest priority for payback in the event of default.


Analyzing a company to determine its current worth.