Sales of nontraded BDCs on a tear

By Bruce Kelly

Dec 2, 2012 @ 12:01 am (Updated 11:00 am) EST

Nontraded business development companies continue to enjoy strong sales from independent-contractor representatives and financial advisers, even though the industry's biggest fund recently closed.

The funds — called nontraded BDCs — raised almost $592.4 million in the third quarter, according to Michael Stubben, president of MTS Research Advisors.

In the second quarter, independent reps and advisers sold $820 million, a milestone for the relatively new product.

Nontraded BDCs became popular in 2009 with the launch of the first fund, FS Investment Corp. Its success spawned many other funds.

Nontraded BDCs invest primarily in the debt of private companies.

After raising $2.6 billion, FS Investment stopped selling to new investors in May. Its parent company, Franklin Square Capital Partners, is raising money for two other nontraded BDCs.

“BDCs have raised $2 billion year-to-date” and are on pace to double their roughly $1.2 billion in sales last year, Mr. Stubben said, adding that the record second-quarter sales were spurred largely by the closing of FS Investment.

One question about the product is the role of sponsors of nontraded real estate investment trusts. A number of such sponsors have BDC offerings, and some in the market question whether real estate managers have the knowledge and background to invest in a potentially volatile area such as private-company debt.

LOOKING FOR YIELD

“Investors are having a hard time finding yield, and we fulfill that need,” said Deryck Harmer, senior vice president of CNL Financial, an alternative investment manager with a long background in real estate.

Real estate sponsors are working with outside managers to launch nontraded BDCs. For example, CNL Financial teamed up with leading global alternative asset manager KKR & Co. LP last year to launch Corporate Capital Trust.

Technically, BDCs are closed-end funds regulated under the Investment Company Act of 1940. Congress created them in 1980 in response to a perceived crisis in the capital markets in the 1970s, with the intent to provide access to capital for small, growing companies.

bkelly@investmentnews.com Twitter: @bdnewsguy