Business development companies (BDCs) invest in private companies. Similar to how private equity or venture capital investors operate, BDCs make loans and often take ownership stakes in their client companies and provide managerial assistance.
In 1980, Congress created BDCs as a means to allow average investors the opportunity to invest in private equity companies. Prior to the creation of BDCs, these kinds of potentially lucrative private equity and venture capital investments were largely limited to wealthy investors and private firms.
BDCs may be liquid investments that publicly traded on a stock exchange or largely illiquid investments that do not trade on an exchange, such as NexPoint Capital. Whether traded or untraded, BDCs are predominately regulated investment companies that pool investor funds to acquire a portfolio of debt or equity of private American companies.
The general characteristics of a non-traded business development company:
- Do not pay corporate taxes on their earnings, but are required to distribute 90 percent of their taxable income to shareholders.
- Invest at least 70 percent of their assets in privately held or thinly traded companies.
- Provide managerial assistance to their client companies.
- Governed by an independent board of directors.
- Make regular public filings with the Securities & Exchange Commission (10-Ks, 10-Qs, 8-Ks, etc.)
- Leverage is limited to 50 percent loan to value.
- Little to no correlation to publicly traded stocks and bonds.
- Can provide a potential hedge against inflation.
- Quarterly portfolio valuations.
- Program Size: $1.5 billion maximum offering
- Minimum Investment: $2,500 (certain states’ minimums vary)
- Distribution Frequency: Monthly*
- Distribution Reinvestment Plan: Shares may be purchased commission-free at the discounted price of 92% of the current offering price during the offering period via the distribution reinvestment plan.
- Share Repurchase Program: Beginning with the first quarter following the one-year anniversary of the date that we satisfy the minimum offering requirement, we intend to offer to repurchase shares on a quarterly basis. Shares will be repurchased at a price equal to 92% of the current offering price in effect on each date of repurchase. Investors interested in tendering shares to be repurchased must either tender at least 25 percent of their shares, or all of the shares the investor owns. If an investor chooses to tender only a portion of their shares, they must maintain a minimum balance of $5,000 worth of shares of common stock following a tender of shares for repurchase. We do not expect to repurchase more than 10 percent of the weighted average number of shares that were outstanding in the prior calendar year.
- Liquidity: Quarterly tender offers. Additionally, the board of directors will consider some type of liquidity event within five years after the offering stage is complete. However, there is no guarantee that a liquidity event will occur within five years after the offering stage or at all.
- Suitability Standards: $250,000 net worth (exclusive of home, furnishings and autos) or minimum net worth of $70,000 combined with minimum gross annual income of $70,000. Some states may have different suitability standards, please refer to the prospectus for additional information.
*Subject to our board of directors’ discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on either a semimonthly or monthly basis and pay such distributions on a monthly basis beginning to later than the first calendar quarter after the month in which the minimum offering requirement is met.
Investing in our shares of common stock may be considered speculative and involves a high degree of risk, including the risk of a substantial loss of investment. See the “Risk Factors” section of our prospectus to read about the risks you should consider before buying our shares including the risk of leverage.
The public offering price of NexPoint Capital’s common stock is subject to a sales load of up to 8% and offering expenses of up to 1%. Estimated annual fund expenses as a percentage of the average net assets attributable to common stock are 6.6%. Expenses and fees are described more fully in the prospectus. Annual expense ratio calculated as set forth in the prospectus and based on public offering price in effect on such date. Please consult the prospectus and read it carefully.
- You should not expect to be able to sell your shares of common stock regardless of how we perform.
- If you are able to sell your shares of common stock, you will likely receive less than your purchase price.
- We do not intend to list our shares of common stock on any securities exchange during, or for what may be a significant time after, the offering period, and we do not expect a secondary market in the shares of common stock to develop.
- Because our common stock will not be listed on a securities exchange, you may be unable to sell your shares and, as a result, you may be unable to reduce your exposure on any market downturn.
- We intend to implement a share repurchase program, but we do not expect to repurchase more than 10% of the weighted average number of shares that were outstanding in the prior calendar year. In addition, any such repurchases will be at a 10% discount to the current offering price in effect on the date of repurchase.
- Our distributions may be funded from offering proceeds or borrowings, which may constitute a return of capital and reduce the amount of capital available to us for investment. Any capital returned to stockholders through distributions will be distributed after payment of sales load, fees and expenses and such amounts will not be recoverable by our stockholders.
- You should consider that you may not have access to the money you invest for an indefinite period of time. An investment in our shares of common stock is not suitable for you if you need access to the money you invest. See “Share Repurchase Program,” “Suitability Standards” and “Liquidity Strategy.”
- The lack of experience of our investment adviser operating under the constraints imposed on us as a business development company and RIC may hinder the achievement of our investment objective.
- We intend to finance our investments with borrowed money, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.
- We are subject to risks associated with middle-market healthcare companies, including competition, extensive government regulation and commercial difficulties.
- Our CLO investments may be riskier and less transparent to us and our stockholders than direct investments in the underlying companies. Our investments in equity and mezzanine tranches of CLOs will likely be subordinate to the other debt tranches of such CLOs, and are subject to a higher degree of risk of total loss.
- There are significant potential conflicts of interest that could affect our investment returns.