Recent high-profile corporate bankruptcies have spooked financial advisors’ clients who plowed cash into high-yielding nontraded business development companies, resulting in a surge in clients cashing out of the illiquid funds by selling back billions of dollars of shares to the investment funds in the final months of last year.
BDCs lend money to private companies - typically small- and mid-sized companies that might have trouble getting loans from banks. Private credit funds like nontraded BDCs sold through broker-dealers emerged after the 2008 credit crisis, when banks were required to raise standards regarding companies they were lending money to.
Recently, nontraded BDC sales have surged at brokerage firms as investors have been looking for high-yields as interest rates increased. Leading funds advisors sell include those managed by Blackstone and Ares.
“Clients were redeeming BDC shares because they looked at the bankruptcies reported last fall and realized these funds might not have as much diversification in their portfolios,” said one senior industry executive, who spoke privately to InvestmentNews about the matter.
The angst for nontraded and illiquid BDCs, which have been gobbled up the past few years by investors hunting for yield, was triggered in September by the bankruptcies of car dealership Tricolor followed by US auto parts supplier First Brands.
Some BDCs, along with credit-focused Interval funds, owned those companies loans, according to company filings and independent reports.
Nontraded BDC fund flows “declined materially as credit concerns weighed on flows and also drove accelerating redemptions,” wrote Steven Chubak, an analyst at Wolfe Research, in a note this week to investors.
According to Wolfe Research, nontraded BDCs raised $3.8 billion in fresh capital from investors in November compared to $5.3 billion in October, a one-month decline of 29%.
And while BDC sales declined late last year, redemptions increased, a note of caution for any product that is not publicly traded and limits the amount clients can sell back to the fund each quarter.
According to investment bank and alts fund tracker Robert A. Stanger & Co. Inc., of the nontraded BDC that so far have reported fourth quarter redemption activity, BDCs with net asset values – NAVs - exceeding $1 billion saw a combined 200% increase in redemptions versus the third quarter, from $981 million to over $2.9 billion.
And the big BDCs saw investors lining up at the window to sell back or redeem their shares, according to Stanger, which tallied “80% of the larger NAV REITs experienced increases in redemptions ranging from 30% to 635%.”
“It is all about interest rates,” stated Kevin Gannon, chairman and CEO of Stanger. “NAV BDCs are income-driven products that are heavily weighted to floating rate debt investments, and during Q4, the average distribution rate dropped below 10% for the first time since September 2023.”
He added that, despite the surge in redemption activity, fundraising remains strong among BDCs, which are poised to pull in over $60 billion in fundraising in 2025.
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