In the first installment of our special report on business development companies, we reviewed their history, summarized the basic precepts that govern them, and discussed some of their key features. This week, we take a closer look at BDC structures.

As we wrote last week, BDCs are companies which issue stock to investors whose capital forms the equity of these entities. While BDCs are mostly owned by public shareholders, some distribute equity to private investors such as pension plans, sovereign wealth funds, family offices and other institutional funds.

This equity can then be leveraged with an equal amount of debt financing typically provided by banks. The cost of that financing varies depending on current market conditions, the nature of the BDC investments, and the reputation of the manager.

For senior debt-oriented BDCs, a good benchmark would be L+200-250 bps plus fees, for a total cost of capital of around 3%. For more yield-focused, junior capital vehicles, this expense would be in the 4% range, comprised of L+300-350 bps plus fees.