BDCs enable investment in the growing private sector.

What is a BDC?
A BDC is a category of investment company created by Congress in 1980 under the Investment Company Act of 1940 to facilitate the flow of capital to small and middle market companies. BDCs provide individual investors direct access to the private equity and private debt investment markets, which typically have been dominated by high-net-worth and institutional investors.

A BDC, like an operating company, must file periodic SEC reports such as 10K’s and 10Q’s, and comply with the Sarbanes-Oxley Act of 2002. However, most BDCs are structured as regulated investment companies (“RICs”) to provide tax-advantaged, pass-through treatment of ordinary income and long-term capital gains from investments directly to stockholders with no corporate tax if at least 90% of taxable income is distributed in a timely manner.

Where does a BDC fit into a portfolio?
Alternative Investments, such as private equity and private debt, have become commonplace among institutional investors. We believe that these sophisticated investors participate in private equity and private debt investments for a number of reasons, including their use as a potential source of risk diversification within a portfolio and for their return potential over the long-term.  Indeed, the Yale University Investment Office, which manages over $22 billion of assets in the Yale Endowment notes that its increased exposure to alternative, or nontraditional, asset classes is a cornerstone of its investment philosophy.

The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power… Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management.

-Yale Endowment Update – 2007

We believe that exposure to FS Investment Corporation provides an individual investor access to these benefits, including increased diversification and potentially higher portfolio returns.

What are some additional advantages of a BDC?
A BDC provides the following benefits to individual investors:

• Access to investments that have historically been dominated by high-net-worth and institutional investors, such as pension funds and endowments.
  
• Professionally managed investments.
  
• Potential to reduce risk by diversifying an individual’s investment over a portfolio of assets.
  
• Regulated investment vehicle with transparent disclosure and periodic reporting.