One of the many benefits of business development companies is their ability to easily hold a wide range of investments. From senior term loans, to unitranche loans, second-lien term loans, mezzanine debt, and even preferred stock, BDCs are incredibly versatile asset management vehicles.

Historically, BDCs allocated more capital to higher-yielding, thus more risky, assets; particularly junior capital. This made sense given that relatively low 1:1 leverage helps protect investors from swings in asset values. It also suited BDCs’ higher return parameters. In the early 2000’s, mezz was a good place to play in the capital structure.

After the Great Recession, BDCs began to climb the capital stack. As our Chart of the Week showcases, the bulk of BDC assets are now comprised of first and second-lien loans. Since the end of last year, the share of those loans has grown, while the concentration on subordinated debt and equity has shrunk.

BDC managers, of course, are reacting to current loan market conditions as are other fund managers. Those trends are favoring issuers of all-senior debt structures, in all their permutations, rather than the classic senior/sub mix.