Business Development Companies: Private Equity for Individual Investors
42 Pages Posted: 30 May 2019
Date Written: May 6, 2019
Using the universe of Business Development Companies (BDCs) for the period 1998-2017 we examine their performance and risk adjusted characteristics and analyze the relationship between BDC returns and the traditional Private Equity Fund (PEF) returns. We find that a BDC traded factor, significantly explains the returns of the PE cash flow based indices of Ang et al. (2018), over and above other traded factors, suggesting a significant relationship between the returns of BDCs and the time varying private equity premium. The BDC traded factor does not explain the industry appraisal-based PE index returns, which however, are explained by the BDC NAV excess return, highlighting the limitations of these indices relative to a market-based PE index. A comparison of the BDC NAV returns with the returns of appraisal-based indices reveals the presence of similar, albeit weaker, smoothing biases. Finally, an event study analysis reveals significant market reactions to quarterly BDC NAV disclosures.
Keywords: Business Development Companies, Private Equity, Risk-Return Characteristics, Market-based Performance Measures, Appraisal-based Performance Measures
JEL Classification: G23, G24, G12, G14
Suggested Citation: Suggested Citation