Sales of non-traded business development companies are down significantly this year as broker-dealers deal with regulatory changes and uncertainty, according to a recent article in Investment News.
With just two months to go, BDC sponsors have raised just $1.26 billion in 2016 compared with $3.9 billion for the 12 months of 2015, according to Robert A. Stanger & Co. Inc., an investment bank. That would mean a dramatic 61.3% year-over-year drop in nontraded BDC sales per month.
Financial advisors may not be recommending BDCs with as much enthusiasm as they were, due to faltering performance, according to reports from industry executives.
In addition, the Department of Labor’s new fiduciary rule, which is scheduled to take effect in April but may be delayed under a Trump administration, has also put a damper on sales of alternative investment products like BDCs.
Like all investments, BDCs do not come without risks. Limited liquidity, distributions that may not be guaranteed in frequency or amount, and limited operating history are just a few risks that investors take on when investing in a BDC.
Business Development Companies can be a good investment for the right investor, along with a diversified portfolio and sufficient due diligence. BDCs should only be recommended to those investors who are able to both weather substantial losses and those who are not in need of immediate liquidity. Investors should be particularly cautious of riskier non-public and non-traded BDCs.
FS Investments, formerly known as Franklin Square, is by far the largest non-traded BDC sponsor with $18.2 billion in assets under management. FS Investments successfully launched the first non-traded BDC, FS Investment Corp., which later listed on the NYSE. Their success caused other product sponsors, many with experience in wholesaling non-traded REITs to independent broker-dealers, to team up with Wall Street credit managers and market new BDCs. Those two factors sent non-traded BDC sales sky rocketing, hitting a high of almost $5.5 billion in 2014 before this year’s dive.
Some industry executives pointed to the decline in the net asset value of non-traded BDCs such as FS Energy & Power Fund as a reason for the slowdown in sales. The fund, which has $4 billion in total assets currently kicks off an annual yield of 8.6%. It launched at $10 per share in 2011 but saw a sharp decline due to energy prices during 2015, closing the year at $6.50. At the end of September, FS Energy & Power’s NAV had adjusted to $7.35.
For more information on The White Law Group’s investigation of BDCs see, BDCs – the good, the bad, and the UGLY.
For more information on FS Investments see, FS Investment Corporation IV Public Offering Price.
To determine whether you may be able to recover investment losses incurred as a result of your purchase of FS Investment Corporation IV or another Franklin Square BDC, please contact The White Law Group at 1-888-637-5510 for a free consultation.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida. The firm represents investors throughout the country in claims against their brokerage firm.
For more information on the firm and its representation of investors, visit www.WhiteSecuritiesLaw.com.