We conclude our series on business development companies by answering your questions:

Is it better for a BDC to be internally or externally managed?

The costs of running an internally managed BDC are typically less than externally managed ones. That’s because it doesn’t pay a fee (which includes a profit margin) to an outside manager, instead covering the salaries and expenses of its own investment staff. On the other hand, externally managed BDCs are often advised by larger firms with other investment vehicles, such as CLOs and separate managed accounts. That breadth gives those firms greater diversity of deal origination and industry research.

How do BDC value their assets?

As public filers, BDCs must show investments on their balance sheets at fair value, not cost. Establishing fair value for generally illiquid assets is, of course, not always an exact science. The type of asset will determine the appropriate technique. Equity value, for example, can be derived using a market enterprise multiple less the debt. Senior loan values may be calculated using discounted cash flows. In conjunction with these approaches, valuation services provide good third-party “marks” on comparable assets.

Must BDCs use rating agencies to rate their loans?