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BDCs Provide Opportunities for Retail Investors as SPAC Boom Continues into 2021

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BDCs Provide Opportunities for Retail Investors as SPAC Boom Continues into 2021

SPAC Boom

2020 saw a historic boom in investor sentiment towards Special Purpose Acquisition Companies (SPACs), also known as “blank check firms”. SPACs are investment vehicles that go to market without an underlying business, instead using its funds to merge with another company after its IPO. Blank check capital deals doubled between the years 2019 and 2020, with over $70 billion raised in 2020 alone — and some investment strategists believe that this boom will continue for years to come.

While sentiment remains strong for SPACs heading into 2021, investors are also turning towards Business Development Companies (BDCs). Strict sponsor requirements may provide a SPAC with as little as two weeks to find a company to merge with. If this requirement isn’t met, the money will be returned to investors. SPACs have gained a negative reputation among some investors because "the lifespan of a typical SPAC is usually not long or successful," says BB&T Capital Markets' Vernon Plack. This is where BDCs may present an interesting opportunity for investors to access privately held companies.

A good analogy: SPACs represent private equity and BDCs represent private credit. SPACs are a way for investors to position themselves for equity in the potential participation in an IPO of a single company, whereas BDCs are a way for individuals to gain exposure to multiple private companies via private credit.

What Makes BDCs Standout

SPACs are created with the mission to acquire a single private company and take it public; on the contrary, BDCs provide capital to multiple small-mid size private companies primarily via debt financing through floating rate loans. It is important to note that these rates are subject to change dependent on if the Fed is required to increase rates.

BDCs have a portfolio already in place when they come to market, which offers exposure to many companies versus SPACs, which if successful in the merger, only provide exposure to one company. BDCs are currently the closest thing to SPACs that private companies have to rely on in terms of private credit. They are regulated by the Securities and Exchange Commission (SEC) per the Investment Company Act of 1940, offering shareholders the protections intended within the act. This allows retail investors to buy into companies that are not large enough to enter the public market, and with investment types which are not typically accessible to the individual investor, through BDCs.

In addition to the private company growth opportunities BDCs provide, they also pay significant dividends. For example, the VanEck Vectors® BDC Income ETF (NYSE: BIZD ™) pays a 10.18%1 dividend yield. The S&P 500, for comparison, currently pays just a 1.47%2 dividend yield as of 2/25/2021. Click here, to view standardized performance for the fund.

Gaining Exposure to BDCs

Choosing individual BDCs may be difficult for investors given that their investments are often in private companies. This is where ETFs may provide an interesting solution. VanEck’s BDC ETF, BIZD, for example, consists of holdings in 25 BDCs thus giving investors access to a wide array of holdings and diversifying the credit risk associated with each individual BDC.

Important Disclosures:

As of 2/25/21

As of 2/25/21

Past performance is not a guarantee of future results.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

SPACs often do not have an operating history or ongoing business other than seeking a Transaction, the value of their securities may be particularly dependent on the quality of its management and on the ability of the SPA C's management to identify and complete a profitable Transaction. Some SPA Cs may pursue Transactions only within certain industries or regions, which may increase the volatility of an investment in them. In addition the securities issued by a SPAC which may be traded in the over-the-counter market, may become illiquid and/or may be subject to restrictions on resale. Other risks of investing in SPACs include that a significant portion of the monies raised by the SPAC may be expended during the search for a target Transaction; an attractive Transaction may not be identified al all (or any requisite approvals may not be obtained) and the SPAC may be required to return any remaining monies to shareholders: a Transaction once identified or effected may prove unsuccessful and an investment in the SPAC may lose value; the warrants or other rights with respect to the SPAC held by a Fund may expire worthless or may be repurchased or retired by the SPAC at an unfavorable price: and an investment in a SPAC may be diluted by additional later offerings of interests in the SPAC or by other investors exercising existing rights to purchase shares of the SPAC.

Business Development Companies (BDC) invest in private companies and thinly traded securities of public companies, including debt instruments of such companies. Generally, little public information exists for private and thinly traded companies and there is a risk that investors may not be able to make fully informed investment decisions. Less mature and smaller private companies involve greater risk than well-established and larger publicly traded companies. Investing in debt involves risk that the issuer may default on its payments or declare bankruptcy and debt may not be rated by a credit rating agency. Many debt investments in which a BDC may invest will not be rated by a credit rating agency and will be below investment grade quality. These investments have predominantly speculative characteristics with respect to an issuer's capacity to make payments of interest and principal. BDCs may not generate income at all times. Additionally, limitations on asset mix and leverage may prohibit the way that BDCs raise capital. The Fund and its affiliates may not own in excess of 25% of a BDC's outstanding voting securities which may limit the Fund's ability to fully replicate its index. An investment in the Fund may be subject to risks which include, among others, investment restrictions, financial sector, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, issuer-specific changes and concentration risks. Small- and medium-capitalization companies may be subject to elevated risks.

MVIS US Business Development Companies Index is the exclusive property of MV Index Solutions GmbH (a wholly owned subsidiary of the Adviser), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors BDC Income ETF is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus , which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing

 

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