A BDC View Under the New Administration

Taxes

The elephant in the room. One of President Biden’s key initiatives is to raise the corporate tax rate from 21% to 28%. While BDCs are structured as pass-through entities (no corporate tax), what impact will the increase in corporate tax rate have on portfolio company investments? This remains to be seen. In addition to raising the corporate tax rate, President Biden is proposing raising the capital gains and qualified dividends tax rate to the proposed ordinary income tax rate of 39.6%. Asset managers that are negatively impacted by this change, and that manage BDCs and other fund structures, may look for ways to offset the reduction in their income. Could this impact the BDCs they manage?

Environmental, Social and Governance (ESG) Issues

Climate change, reduced emissions, clean energy, social justice, and a number of other ESG related topics have been at the forefront of President Biden’s agenda. President Biden has discussed giving tax breaks and other advantages to companies that focus on the environmental issues. BDCs that invest in portfolio companies that are making significant strides in ESG areas could stand to profit, not only from fiscal advantages, i.e., tax breaks, but also from increased investment by social impact focused investors.

COVID-19 Vaccine Rollout

President Biden has promised “100 million vaccines in 100 days.” This cannot come soon enough. With this, BDCs are hoping the market and economy stabilize in the coming months so that they can return to the more standard business of monitoring their portfolio companies’ performance. The sooner BDCs can get back to “business as usual,” the better.

Increased Opportunity

Distressed assets and low interest rates could present an opportunity for BDCs. With the vaccine roll-out and stability hopefully on the horizon, the opportunity for small and middle market companies affected by COVID to rebuild themselves seems positive. The problems faced by these companies in 2020 were not foreseen or standard. While it is possible to forecast diminished revenues, almost no one was prepared for 2020. With stability and a more positive outlook, BDCs may be able to profit from companies on the positive trend in 2021 and beyond.

Small Business Investment Company (SBIC)

One of the focuses of President Biden’s new stimulus package is getting small businesses through the pandemic and back on track. BDCs can do their part in helping small businesses by setting up SBICs with the U.S. Small Business Administration (SBA). The SBIC can then leverage capital raised from private investors, such as banks, pension funds or high net-worth individuals, with low-rate government-guaranteed debt obtained through the program. This could be just what is needed for “Main Street” to get back on track.