Pace of investors selling nontraded BDCs slows but remains significant,  says Fitch

The marketplace for private credit funds known as nontrade business development companies has struggled this year, with new sales dropping and financial advisors’ clients selling back shares to the funds – a process known as customer redemptions – reaching highs. 

Major fund managers, Blue Owl is one, have faced intense scrutiny and a struggle to raise fresh capital. While the pace that investors sold back their shares to fund managers and sponsors dipped in the third quarter, according to various reports, nontraded BDCs still have investors looking to redeem billions of dollars of shares for the rest of this year and beyond.

According to a report this morning from Fitch Ratings, redemption requests in the third quarter for 13 of the 15 perpetually non-traded BDCs averaged 9.8% of shares. That’s compared to an average of 10.3% of shares during the second quarter this year.

The rush to the exits of nontraded BDCs is a staggering turnaround for an asset class that had been white hot for the past several years. Nontraded BDCs offered yields to investors of more than 9% to 11% - as well as lucrative fees for fund managers and commissions to advisors who sold them.

Nontraded BDCs, which raise capital from investors and buy loans of private companies to generate yields and interest, continue to cap redemptions at 5% per quarter. The nontraded funds do not trade on an exchange, so the selling back to managers and sponsors is almost the only way advisors’ clients can get liquidity.

One longtime brokerage and alternative investment executive said that, while investors’ redemptions may have dipped in the third quarter, nontraded BDCs will face redemptions well into next year and likely beyond.

In other words, investor demand to dump nontraded BDC shares is not disappearing anytime soon.

“There’s more demand by investors every quarter to redeem these shares that has nothing to do with the backlog demand, or those clients already waiting in line to sell,” said Mark Goldberg, a former broker-dealer chief and founder of Alternative Investments Market Intelligence. “That investor demand may be cresting, as Fitch and others have noted, but it will take many quarters for the problem to be resolved.”

Goldberg added that historic levels of client redemptions for such funds that have been up and running for close to five-years is 3% per quarter on average.

For example, one nontraded BDC, the Blue Owl Technology Income Corp., is facing client redemptions requests of 39% of its shares, according to the Fitch Ratings report.

“Repurchase activity began to ease in [the third quarter],” according to Fitch Ratings. “Redemption requests were below 5% of shares for six BDCs. However, levels varied across the sector. For the nine BDCs with tender requests above 5%, a substantial share reflected unfulfilled investor requests that were prorated in prior quarters rather than new investor requests.”