Business development companies (“BDCs”) provide an important and growing alternative source of capital to small and middle market companies that may not otherwise have access to bank financing.  However, BDCs have been facing challenges raising money partly due to the recent decline of institutional ownership resulting from (1) the requirement of the SEC for registered open-end funds to disclose “acquired fund fees and expenses” (“AFFE”) of other funds they invest in (including BDCs) and (2) the limitation under Section 12(d)(1) of the Investment Company Act of 1940 (“Section 12(d)(1)”) of the ability of other registered investment companies (including exchange-traded funds) to acquire more than 3% of a BDC’s total outstanding stock.  In addition, the recent release of the U.S. Department of Labor’s final fiduciary rule (the “DOL final rule”) will likely result in ERISA plans avoiding investments in BDCs, whether directly or indirectly through an index.  The recent decline of institutional ownership in BDCs has negatively impacted the ability of BDCs to provide capital to small and middle market companies, although the increasing use of unitranche financing has created new financing opportunities for middle market companies.

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