Business Development Companies are a Form of Alternative Investment
BDCs have been a growing asset class that markets itself to investors as an alternative investment. However, BDCs are speculative, suffer from high commissions and fees, and are inappropriate for most investors. Commissions and fees on Non-Traded BDCs can be as much as 11.5 to 12 percent. Also, BDCs often have additional incentive compensation.
One of the largest BDC managers is Franklin Square Capital Partners which manages multiple Non-Traded BDC funds including the FS Investment Corporation (NYSE:FSIC) FS Investment Corporation II (FSIC II), FS Investment Corporation III (FSIC III), FS Investment Corporation IV (FSIC IV), FS Energy and Power Fund (FSEP), and FS Global Credit Opportunities.
There is Concern that Non-Traded REITs are Not in Investors Best Interests
There are a couple of reasons for closing the funds to investors including serious problems with their lack of transparency and the interrelationship with affiliated companies. In addition, the proposed new fiduciary standards for advisers and mandated fee disclosures is causing the industry to question whether these products can be sold anymore. Basically, the industry is worried that Non-Traded REITs are not in investors best interests, an opinion our firm has echoed before. (See Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part I)
Be Especially Cautious of “Small Business” BDC’s
One would think that given the pending collapse and/or major shakeup of the Non-Traded REIT market Non-Traded BDCs would be similarly effected with the same concerns. Not so fast. Slap the “small business” label on any investment and lawmakers line up to make this failed investment class even riskier for retail investors. According to InvestmentNews, The House Financial Services Committee on November 4, 2015, approved the Small Business Credit Availability that would allow BDCs to raise their leverage limits from 1:1 to 2:1 and increase the amount of money that they can invest in financial firms among other changes. Non-Traded BDC investments are illiquid and likely to face poor performance.”