4 Reasons to Like Business Development Companies

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Amy Calistri

NEW YORK ( StreetAuthority) -- In 2011, the large health care and pharmaceutical company Johnson & Johnson ( JNJ) generated $13.9 billion in free cash flow and maintained its "AAA" credit rating.

The drug maker Pfizer ( PFE) had more than $29 billion of cash and short-term investments on its balance sheet as of October 2011.

The tech giant Oracle ( ORCL) had roughly $30 billion of cash and short-term investments on its balance sheet as of November 2011. In October 2011, computer company Dell ( DELL) was sitting on more than $13 billion of cash on its books.

Do I want to invest in these cash-rich companies?

Not particularly.

These large and mature bellwethers have to work hard to provide enough growth each year to budge their bottom lines. That's one reason they buy so many young, small companies that are at the beginning of their growth spurts.

For instance, in the past few years, Johnson & Johnson bought a number of small, fast-growing companies, such as Peninsula Pharmaceuticals, Tibotec-Virco NV and Acclarent.

Meanwhile, Pfizer scooped up BioRexis Pharmaceutical, FodRX Pharmaceuticals and Excaliard Pharmaceuticals. Oracle acquired Ksplice, Eneca Technologies and Sleepycat Software. And Dell picked up Ocarina Networks, Boomi and Force10 Networks.

All of this leads me to ask: Why should I buy slower-growing mega-companies if I can buy what they are buying?

There's a hitch of course. All of the small companies I listed above were privately-held companies -- not publicly-traded on a stock exchange. But there is a workaround.

I may not be able to directly buy into small, privately-held companies -- but I can invest in a company that does.

Business development companies (BDCs) loan money to private companies. In return, BDCs get back interest and -- in many cases -- an equity stake in the companies they loan to. If one of the companies in its portfolio is acquired or goes public, then the BDC gets a piece of the action. By law, BDCs must distribute 90% of their earnings to shareholders. As a result, BDCs have very rich dividend yields.