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Dear Mr. Berko:

W.E., Des Moines

Dear W.E.:

In 1980, Congress approved a new corporate classification called “business development company” (BDC) to encourage the flow of public capital to private companies.

Traditionally, private company investing was available only to accredited investors such as large institutions, sophisticated investors, limited partnerships and private banks and offered only limited liquidity. By investing in a BDC, the shareholder has the liquidity of a publicly traded stock as well as the pluses (and minuses) of an investment in private equity. Investors also have the advantage of a “pooled risk,” the effect of which diversifies the portfolio, providing a greater measure of safety.

This might be one of the best times to invest in a portfolio of BDCs. Most are trading at half their previous high prices established in the first quarter of 2007. A tight credit market plus a slowdown in business activity will allow BDCs to cherry-pick their investments. So when business activity picks up and the credit markets become more fluid in a couple of years, BDCs may become one of the best-performing sectors. And a 10-percent-plus dividend makes it kind of easy to wait a couple of years for a BDC portfolio to make new highs.

Until early 2003, there were only four publicly traded BDCs; today there are 27. The following 12 BDCs have double-digit yields and should be able to walk through the next two years unscratched and emerge stronger with higher share prices.

Ares Capital Corp. (ARCC-$12.36) yields 13.6 percent, provides loans between $10 and $50 million and also receives equity shares. Allied Capital Corp. (ALD-$18.89) yields 13.8 percent and offers long-term debt between $10 and $150 million for sponsor-led buyouts, acquisitions and growth. American Capital Strategies Ltd. (ACAS-$31.91), yielding 12.9 percent, is the largest BDC and funds growth, acquisitions and recapitalizations in amounts up to $800 million. Kayne Anderson Energy Development Co. (KED-$24.04), yielding 6.9 percent, makes debt and equity investments in private energy companies. KKR Financial Holdings LLC (KFN-$12.51) yields 12.8 percent; it invests in secured and unsecured loans, high-yield corporate bonds, asset-backed securities and equity securities.

Kohlberg Capital Corp. (KCAP-$12.30) yields 13.3 percent and organizes, structures, finances and manages term loans, mezzanine investments and equities. Apollo Investment Corp. (AINV-$18.28) yields 11.4 percent and provides between $20 million and $150 million in capital for mezzanine and senior loans and assumes equity positions. BlackRock Kelso Capital Corp. (BKCC-$13.46) yields 12.8 percent and offers between $10 million and $50 million in the form of senior and secured debt, which often includes equity. Compass Diversified Holdings (CODI-$12.94), yielding 10 percent, is a private-equity investor in businesses with revenues between $10 million and $40 million. Gladstone Investment Corp. (GAIN-$8.78) yields 10.9 percent and makes debt and equity investments in small businesses to facilitate acquisitions, recapitalizations and changes in control, providing up to $15 million in debt. MCG Capital Corp. (MCGC-$5.98) yields 18.1 percent and provides capital and advisory services to companies with revenues in the $20 million to $200 million revenue range.

Patriot Capital Funding Inc. (PCAP-$10.37) yields 12.7 percent and provides debt and equity financing up to the $20 million range.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©Copley News Service