In this lesson
- Terms: BDC, Asset coverage (BDCs), Interval fund, Evergreen fund, Redemption gate, Separately managed account
- To work through: a worked example, a 28-second film, 3 check questions
Underlined terms show their definition when you rest on them or tap them.
Institutions mostly invest through closed-end private credit funds, which work like the private funds in the first course: commitments, calls, a fixed life. Large investors may use a separately managed account (separately managed account). For wealthier individuals and smaller institutions, two regulated vehicles matter most.
A business development company is a closed-end investment company, created by the Small Business Investment Incentive Act of 1980 to channel money to small and mid-sized private businesses. Some are listed on an exchange; others are offered to the public but not listed, and often let investors out only through periodic repurchase programmes.
Regulation note: under the Investment Company Act, a BDC generally may not buy other assets unless at least 70% of its total assets are qualifying assets, chiefly investments in eligible portfolio companies. Its required asset coverage (BDCs) is 200%, or 150% once the lower level is approved and disclosed: by the required majority of its non-interested directors (effective a year later) or by its shareholders (effective the next day). In plain terms, up to about $1 of debt for each $1 of equity, or about $2 at 150%. A BDC whose shares are not listed on an exchange must then offer to buy back its shareholders’ shares, 25% in each of the next four calendar quarters.
An interval fund is a registered closed-end fund that makes repurchase offers on a fixed schedule under SEC Rule 23c-3: every three, six or twelve months, for between 5% and 25% of its shares, for cash at net asset value, with notice 21 to 42 days ahead and a repurchase fee of no more than 2%. If more is tendered than the offer, the fund may buy up to 2% more of its shares and otherwise buys pro rata. The IMF has flagged that semi-liquid funds of this kind can face first-mover pressure when many investors want out at once.
Two calculations under the rules above.
| BDC with $100m equity at the 150% minimum: debt it can carry | $200 million |
|---|---|
| Its asset coverage: $300m assets ÷ $200m debt | 150% |
| Interval fund of $1 billion offers 5% | $50 million |
| Investors ask for $100 million (no extra 2% taken) | each gets 50% of what they asked |
The BDC’s leverage and the interval fund’s exit are both set by rule, not by the market. Simple example: asset coverage counts senior securities as the Act defines them.
Key takeaway: why it matters to investors
The same loans can sit in a ten-year fund, a listed BDC that trades every day, or an interval fund that lets a slice of investors out each quarter. The wrapper decides the leverage, the fees and, above all, how easily an investor can get money back when many want it at once.
Watch · 28 seconds
Own loans to private companies through a shareA BDC, or business development company, is a U.S. investment company that lends to or invests in private mid-sized businesses, and typically passes most of its income to shareholders. Some trade on an exchange.
Also: A fund that buys you out, one slice a quarter, A private fund with no end date
Check yourself
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Sources
The facts in this lesson were checked against these public pages on November 11, 2026. Examples use round invented numbers. Simple examples; terms vary by fund.
- Private Credit: Characteristics and Risks (FEDS Notes, February 23, 2024; Fang Cai and Sharjil Haque), Board of Governors of the Federal Reserve System. Definition (debt-like, non-public instruments from non-bank lenders, mostly through funds and BDCs); nearly $1.7 trillion as of June 2023, direct lending about $800 billion or half; borrowers typically middle-market firms with $10 million to $1 billion of revenue; direct loans typically senior secured; about 15% hybrid loans, more junior; almost all floating rate; average maturity around five years, about 16% due in 2024; spreads above syndicated term loans; mean interest coverage about 2.0x vs 2.7x for leveraged loans (2023); default rates low vs syndicated loans through October 2023, not yet tested by a prolonged recession; post-default value around 33% vs 52% syndicated loans and 39% high-yield bonds (KBRA DLD); recent deals often without financial maintenance covenants (industry commentary); Form PF Q4 2021: pensions about 31% of private credit fund assets, other private funds 14%, insurers and individuals about 9% each; BDCs created by the Small Business Investment Incentive Act of 1980.
- Early Warning Signals in Private Credit? What BDC Portfolios Reveal about Emerging Risks (Current Policy Perspectives 26-6, August 5, 2026), Federal Reserve Bank of Boston. US private credit over $1 trillion; PIK means adding unpaid interest to principal; share of BDC loans with PIK rose from about 6% in early 2022 to about 10% by early 2026; median BDC spreads 4 to 5 percentage points over SOFR, narrowing about 1 point over two years; some BDCs are publicly offered but not listed and often have repurchase programmes.
- 15 U.S. Code § 80a-54 (business development companies: functions and activities), Legal Information Institute, Cornell Law School. A BDC may not acquire other assets unless the qualifying assets (chiefly investments in eligible portfolio companies) are at least 70% of its total assets.
- 15 U.S. Code § 80a-60 (business development companies: capital structure), Legal Information Institute, Cornell Law School. A BDC’s required asset coverage is 200%, or 150% if approved by the required majority of directors (effective one year later) or by more than 50% of shareholder votes cast (effective the next day) and disclosed; a BDC not listed on an exchange must then offer to repurchase shares, 25% in each of the four following calendar quarters.
- 17 CFR § 270.23c-3 (repurchase offers by closed-end companies: the interval fund rule), Legal Information Institute, Cornell Law School. Repurchase offers at intervals of three, six or twelve months, for 5% to 25% of outstanding shares, for cash at NAV; notice 21 to 42 days before the deadline; repurchase fee at most 2%; if more is tendered, up to 2% more may be bought, otherwise pro rata.
- Global Financial Stability Report, April 2024, Chapter 2: The Rise and Risks of Private Credit (executive summary), International Monetary Fund. Private credit has grown rapidly to provide long-term financing to middle-market firms, typically floating rate, to relatively small, highly leveraged borrowers; customised terms; banks less willing to lend to the middle market; semi-liquid funds could create first-mover and run risks; uncertainty about valuations and incentives to delay recognising losses.
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