Today's economic conditions are attractive for BDCs (business development companies), and some benefit from businesses seeking alternative financing sources.
- As banks tighten lending standards, more companies are turning to BDCs for financing.
- BDCs that focus on smaller and technology-oriented companies are seeing a meaningful increase in their opportunity set.
- The economic environment supports high interest rates and low default rates — a compelling combination for BDCs.
As the Federal Reserve has tightened interest rates over the past 18 months, banks have tightened lending standards. Many BDCs are poised to fill this gap in credit markets. In particular, BDCs that specialize in serving smaller and middle market companies ($50M or less in EBITDA) are benefiting, as are those with a focus on technology companies. The collapse of Silicon Valley Bank in March 2023 was a key turning point for these segments, in our view, spurring a growing number of small and tech-oriented companies to consider BDCs as a source of financing.
Putnam BDC Income ETF (PBDC) can take advantage of this potential growth opportunity. With an active strategy, we can build an attractive level of exposure to this emerging trend. Individual BDCs might be over- or underexposed to smaller companies and the technology sector. We can actively position the ETF in several BDCs to gain exposure to areas of the market with compelling opportunities.