As reported by The Wall Street Journal on March 19, 2016 (“These High-Fee, Unlisted, Junk-Based Funds Aren’t Working Out”), investors who poured $22 billion into an obscure Wall Street investment product known as “Non-Traded Business Development Companies (BDCs)” are now pulling out record sums.
BDCs are built out of loans to small and medium-size companies with less than stellar credit, but are less transparent than regular mutual funds, typically make investors pay upfront fees of at least 10% and only accept withdrawal requests once a quarter.
According to an analysis reported by the WSJ, “the move to the exits is accelerating. Investors pulled $47.3 million out of nontraded BDC’s in the third quarter of 2015, up from $25.7 million in the second quarter” and “performance has been slipping, too. Across the industry, the value of the funds’ assets at the end of September was on average 16% lower than their initial offering price to investors.”
Non-traded BDCs were part of a fast-growing class of alternative, high-commission investments sold to individual investors in recent years. Marketing materials promised steady dividends, yields as high as 8% and a haven from volatile markets, according to fund documents and executives.
The fees, though, exceed those of most products pitched to retail investors. For example, one non-traded BDC, cited in the WSJ article, 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 us…you would have to experience a total return on your investment of between 14% and 18% in order to recover these expenses.”
Meanwhile, “Wall Street continues to push the products while regulators are watching closely.” Paul Mathews, Finra’s vice president for corporate financing, was quoted in the WSJ article as having said the products are an ‘ongoing concern’ for the regulator and that ‘firms must ensure they are suitable for an investor’s risk profile and investment strategy.’
Part of what concerns regulators is that non-traded BDCs are being sold using many of the same networks of brokerage firms and typically charging the same high upfront commissions as non-traded real estate investment trusts – another product with a multitude of significant issues.
“It’s kind of like weeds,” said William Galvin, the top Massachusetts securities regulator. “You whack them in one part of the garden, but they come up in another.”
If you are an individual or institutional investor who has any concerns about your investment in any Business Development Company (BDC), please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).