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A Warning Shot Across the Bow for Investors in Business Development Companies (“BDCs”)

An April 10, 2016 article in The Wall Street Journal (“A $2.5 Billion BDC Halts Redemptions After Limit Reached”) describes how volatile markets have prompted a “rush of investors” to attempt to redeem their investments in non-traded Business Development Companies.

The Business Development Corporation of America (“BDCA”), a $2.5 billion fund, said in a securities filing last month that it is halting redemptions for the quarter after the fund’s pre-established limit was hit. The move comes as volatile markets have hurt some of the value of the underlying assets of such funds, prompting investors to flee over the past several months.

Even in normal times, non-traded business development companies typically only allow investors to cash out every three months. This, however, appears to be the first time one has bumped up against internal restrictions that limit the amount of shares a fund is able to redeem at one time, experts say. The fund had limited redemptions to 2.5% of its outstanding shares per quarter, which is typical for its peers.

Investors had reportedly asked to cash in about 7.4 million shares, but the fund allowed only 41% of those redemptions, according to the filing dated March 11.

The fund’s net asset value fell by 7.9% last year. The shares that were redeemed were worth about $28 million, the filing shows.

Non-traded BDCs make loans to small and medium-size companies with less than stellar credit. They attracted $22 billion from investors over the past several years, as interest rates near zero sent investors in search of higher yields.

BDCA, which invests in loans to midsize companies in the U.S., is among the largest. In addition to halting redemptions in its latest offering, the fund recently changed its policy to allow withdrawals only twice a year rather than once a quarter. Investors will be able to cash in as much as 5% of the fund’s outstanding shares in each of those periods.

Investors pulled a total of $64 million from non-traded BDCs in the fourth quarter of 2015, the latest data available, up from withdrawals of $47 million in the third quarter, setting another industry record, according to Summit Investment Research.

More funds are likely to hit the redemption limit if the trend towards escalating redemptions should continue.

As noted in the article, although the funds typically promise protection from market volatility and yields as high as 8%, they include a number of risks to investors which include withdrawal limits, upfront fees of at least 10% and the opinion that non-traded BDCs also are considered to be less transparent than regular mutual funds.

Sales also have been slowing as performance among the funds has dropped with the net asset value of non-traded BDCs having reportedly declined by an average of a 12.5% in 2015.

If you are an individual or institutional investor who has any concerns about your investment in any Business Development Company investment, 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).

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