In a time of record low interest rates, investors have sought for yield in alternative products like BDCs or nontraded business development companies. Unfortunately investor may not have known what they were getting into when investing in BDCs.
According to the The Wall Street Journal, BDCs carry a number of “unusual risks” and investors are “pulling out at record sums.”
BDCs typically invest in debt of small and medium sized businesses. When those businesses are profitable, so is the BDC. However, BDCs often invest in businesses that were unable to secure bank loans and debt considered below investment grade.
In addition, BDCs typically are high commission products that carry significant upfront fees. According to The Wall Street Journal, one nontraded BDC said in its disclosures that its 10% sales load and likely 2% offering expenses mean only $88 of every $100 of shares bought ‘will actually be invested in BDC, meaning the investor would have to experience a total return on their investment of between 14% and 18% in order to recover these expenses.
Despite the fact that investors pulled $47.3 million out of non-traded BDCs in the third quarter of 2015, according to The Wall Street Journal, the backer of one of the larger nontraded BDCs, Corporate Capital Trust, announced the launch of a second fund.
The resemblance BDCs share with another high commission and illiquid product, Non-traded REITs, has drawn the attention of securities regulators. Brokers that sell BDCs are advised to firmly adhere to suitability requirements when recommending BDCs to clients.
Brokers have a fiduciary duty to perform due diligence on any investment and to insure that investment recommendations are consistent with their client’s age, net worth, risk tolerance, investment experience and objectives, risk tolerance. If a broker overlooks suitability requirements, investors may have an actionable claim to recover their losses in a product in a claim through FINRA dispute resolution.
If you have questions about your investment in a nontraded BDC and would like to speak to a securities attorney about your potential to recover losses through FINRA arbitration, please call The White Law Group at 1-888-637-5510 for a free consultation.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Vero Beach, Florida.
For more information on The White Law Group, please visit our website at www.WhiteSecuritiesLaw.com.