Nontraded BDC sales in worst year since 2010

The illiquid product's three-year decline is partially due to new regulations and poor performance

Nov 22, 2017 @ 1:20 pm

By Bruce Kelly

Sales of nontraded business development companies are on track to decline for a third consecutive year and are on the way to posting their worst year for equity raising since 2010, when the product was just beginning to be widely sold by independent broker-dealers.

Nontraded BDCs managed to raise just $624 million over the first nine months of the year, compared to last year's 12-month sales total of $1.5 billion, according to Robert A. Stanger & Co. Inc., an investment bank that tracks the sales of alternative investments, including nontraded real estate investment trusts. And sales this year are far below the levels seen when the product was at its peak in 2014, when brokers sold $5.5 billion of nontraded BDCs, according to Stanger.

(More: Nontraded BDC sales sink like a stone in 2016.)

The product was first sold in 2009 and raised almost $100 million. A year later, sales totaled $369 million, according to Stanger.

Public Non-Listed BDC Fundraising 2007 – YTD thru September 2017
Source: The Stanger Market Pulse

Nontraded BDCs typically are closed-end investment companies that invest primarily in debt and equity of private companies. Yields can be attractive due to the BDCs' exposure to high credit risks amplified by leverage.

REIT-LIKE

Like nontraded REITs, in the past nontraded BDCs were high-commission products sold to investors seeking yields to build an income stream and typically paid advisers a hefty upfront commission of 7%.

Similar to REIT sponsors, BDC managers have been adding alternative fund classes to decrease the upfront commission, shifting a percentage of sales commissions paid to advisers over time. Such changes in commissions make the product more palatable under new regulations, including a new industry pricing rule, known as 15-02, that gives investors greater clarity on the upfront loads of illiquid investments like nontraded BDCs.

And the Department of Labor's new fiduciary rule has also put a damper on sales of alternative investment products like BDCs. Sales of nontraded REITs are likewise poor and headed for their worst year since 2002, with the industry on track to raise just $4.4 billion in equity in 2017, about $100,000 less than a year earlier, according to Stanger.

RESTRICTIONS

Some BDC managers, including American Realty Capital and W.P. Carey, have exited the business, contributing to the decline in sales. And BDCs are typically restricted to selling only one share class per company, unlike REITs or mutual funds, executives said. That makes sales potentially more difficult as broker-dealers cut down the number of products with commissions on their platforms to comply with the DOL fiduciary rule.

"The reasons for the decline in BDC sales are the same as nontraded REITs," said Kevin Gannon, managing director at Stanger. "To some degree, it's regulation, 15-02 and the DOL fiduciary rule. Performance is also an issue. Some deals are heavily invested in energy transactions that did not fare well."

"In the wake of the DOL rule, and the continued uncertainty around it, it is becoming increasingly important for products to offer multiple share classes and BDCs are limited in their ability to do so," noted Mike Gerber, executive vice president, corporate affairs at FS Investments, the leading manager of nontraded BDCs.

0
Comments

What do you think?

View comments

Recommended for you

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Featured video

Events

InvestmentNews celebrates diversity & inclusion in the financial advice business

Highlights of the Excellence in D&I Awards, showcasing the achievements of 26 individuals and firms that are moving the needle when it comes to diversity and inclusion.

Latest news & opinion

Invesco to buy OppenheimerFunds

Deal brings Invesco another $246 billion in assets, as well as high-fee actively managed funds.

Dawn Bennett found guilty of $20 million Ponzi scheme

Jury took less than five hours to convict the former financial adviser and radio host.

10 advisory firm employee benefits you won't believe

Some advisory firms stand out for their creative efforts to keep their troops happy and engaged. Spa retreat, anyone?

401(k) record keepers seek new revenue streams to 'save themselves'

Service providers are getting pinched by fee compression.

Small-cap funds take a beating

For most of the year, the sector had outperformed, but that all changed last week.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print