logo
  Join        Login             Stock Quote

Are Nontraded Business Development Companies The Next Big Problem For Brokerage Firms?

 November 29, 2012 06:27 PM


With non-traded REIT sponsors moving in to the new nontraded business development companies (nontraded BDCs) space, are nontraded BDCs the next bubble?

BDCs are closed-end funds regulated under the Investment Company Act of 1940. Congress created them in 1980 in response to what had been a perceived crisis in the capital markets in the 1970s, with the intent to provide access to capital for small and growing companies.

BDCs invest in the debt and equity of small to mid-market companies, with the instruments ranging from the senior secured level to below investment grade or "junk," an asset class typically not available to retail investors.

Some of the largest BDC companies are FS Investment Corp. II, Corporate Capital Trust, FS Energy Power Fund, Business Development Corp. of America, VII Peaks- KBR Co- Optivist Income BDC II, Sierra Income Corp., and HMS Income Fund.

[Related -Chart Says This Retailer's Comeback Isn't Finished]

According to a report in the Investment News, nontraded BDCs continue to enjoy strong sales from independent contractor reps and advisers.  As such, these products appear to be being sold by the small broker-dealers, just as non-traded REITs were.

Nontraded BDCs apparently raised almost $592.4 million in the third quarter and $820 million in the second quarter.  This represents a large influx of capital in to these investments and certainly raises the question as to whether all investors buying in to this space have the sophistication to understand the pitfalls of these high return, high risk investments.

Nontraded BDCs became popular in 2009 with the launch of the first such fund, FS Investment Corp. Its success spawned many other funds.

[Related -ETF Performance Review: Major Asset Classes | 19 Dec 2014]

Another question about the product is the role of nontraded real estate investment trust sponsors. A number of nontraded REIT sponsors have BDC offerings, which raises the question of whether real estate managers have the knowledge and background to invest in a potentially volatile area such as private-company debt.

The risk, of course, is that these products (similar to nontraded REITs) get sold to the wrong investors (i.e. retirees attracted to the high yield but unaware of the enormous risks) or that the investment sponsors lack the expertise to properly vet these offerings and sell BDCs with higher risk than is disclosed to the investors.

The Investment News report indicates that several real estate sponsors are working with outside managers to launch nontraded BDCs. For example, CNL Financial teamed up with leading global alternative asset manager KKR & Co. LP last year to launch Corporate Capital Trust.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageChart Says This Retailer's Comeback Isn't Finished

One of the surprises, at least on the surface, of the market's recent swoon was the outperformance of read on...

article imageETF Performance Review: Major Asset Classes | 19 Dec 2014

It’s all about real estate investment trusts (REITs) these days when it comes to bullish performance among read on...

article imageOil and Global Stock Markets Rebounding Sharply

So far so good on our expectation of a 4 to 5% pullback and then a resumption of the bull read on...

article imageGrading the FOMC

Love its members or loathe them, you have to admire the gradual impact the policy-making committee has had read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.