BDCs offer access to private debt and private equity in a publicly traded instrument. They are rapidly gaining popularity because they promise to be noncorrelated to stocks and most types of bonds and offer attractive annual dividend payouts.

BDCs are:

1. Highly leveraged.
2. Lightly regulated.
3. Highly volatile.
4. Offer investment advisors very high commissions.
5. Charge annual expense ratios exceeding 10%.

In addition, depending on how the BDC is traded (publically, non-traded, or privately) will impact liquidity. Finally, BDC dividends are usually taxed as ordinary income, which is less favorable than other income-oriented investments such as municipal or treasury bonds, dividend-paying stocks, or REITs.

Smarter Bear recommends getting advice from someone without a financial interest in the transaction before you decide to invest.