Griffin Terminates BDC, Cites Changing Regulatory and Market Conditions

Griffin-Benefit Street Partners BDC Corp., a publicly registered non-traded business development company, is actively exploring strategic options for the company.

Citing a changing regulatory environment, structural challenges, as well as market and yield dynamics associated with operating a non-traded BDC, Griffin-Benefit Street Partners’ board of directors voted to cease the current offering effective March 15, 2016.

Griffin Capital will work with the board to explore strategic options for the BDC that are “in keeping with the best interests of the shareholders.” In that regard, Griffin Capital is working to expand the Griffin Institutional Access family of investment products to build upon the success of Griffin Institutional Access Real Estate Fund (GIREX). Among other initiatives, Griffin intends to develop a global credit oriented interval fund that will complement and expand upon the investment mandate of the BDC.

During an exclusive interview with The DI Wire, Griffin Capital CEO Kevin Shields explained the upside of possibly merging the company into an interval fund structure, upon shareholder approval.

“The non-traded BDC market is coming under increasing regulatory pressure between FINRA NTM 15-02, the proposed DOL fiduciary rule and NASAA’s asset concentration limitation – the confluence of which will deteriorate industry BDC sales. The BDC structure is limited in its investment mandate, and given most all non-traded BDCs invest at the top end of the capital stack, it is difficult to overcome the high front end load. By contrast, the interval fund structure allows for a broad pallet of investment alternatives, has lower up-front fees, lower ongoing fees, and given our exemptive relief, can offer multiple share classes to fit the needs of the advisors and their clients. Further, the interval fund is not hampered by the regulatory headwind facing the non-traded BDC space.”

He added, “Whereas making this type of structural shift mid-offering is difficult to accomplish and may cause short-term market confusion, we are firm in our resolve that the lower fee proposition of the interval fund, coupled with the increased breadth of debt alternatives in which the fund can invest, will drive enhanced shareholder returns and improve their overall experience. In the end, this is about doing the right thing for our investors.”

The motivation for the BDC’s strategic structural shift includes a number of factors. According to Shields:

Non-traded BDC sponsors focus on originating and/or acquiring senior secured and senior debt of private corporations or public corporations with a market equity capitalization of less than $250 million – this narrow bandwidth restricts efficient capital deployment and allocation in a fluid and dynamic credit market.

High offering fees, particularly for a debt platform, have to compress to enhance an investor’s positive economic experience.

A positive investor outcome is further challenged given the propensity of the public BDC market to trade at a discount to net asset value, which recently exceeded 20 percent.

A non-traded BDC illiquidity premium is illogical to the extent an investor can acquire, in the current market environment, a liquid, traded BDC with a demonstrably higher current return.

Shields indicated that, “In Griffin Capital’s opinion, the interval fund structure offers a number of potential advantages to investors over the business development company structure including:”

Greater net asset value transparency with daily pricing frequency.

Enhanced liquidity – interval funds are required to offer shareholders periodic redemptions of at least 5 percent of the fund’s outstanding shares, typically on a quarterly basis.

Wider range of investment opportunities – BDCs, unlike interval funds, must have at least 70 percent of their assets invested in specific types of issuers.

Lower fees – unlike BDCs, interval funds generally are prohibited from charging investors an incentive fee.

Shields continued: “Benefit Street Partners is an important relationship to us and their involvement is critical to achieve ongoing success. We could not be more pleased that we have the full support of Benefit Street to engage in this strategic shift. Further, we look forward to sharing information with the market in the near term regarding both our plans for [the BDC] and our exciting product development initiatives.”

Griffin Capital BDC Advisor is an indirect subsidiary of Griffin Capital Corporation and serves as the investment adviser to Griffin-Benefit Street Partners BDC. The advisor is primarily responsible for managing all day-to-day operations and providing investment advisory and management services to GB-BDC, including reviewing and approving investments.

Griffin Capital and affiliates, through the end of 2015, owned, managed, sponsored and/or co-sponsored an institutional-quality portfolio of commercial real estate located in the United States and United Kingdom, representing approximately $6.7 billion in asset value.

Benefit Street Partners serves as the sub-adviser to GB-BDC and is primarily responsible for assisting with sourcing, originating, conducting due diligence on, and recommending investments to Griffin Capital BDC Advisor. Benefit Street and its affiliates manage assets across a broad range of credit strategies including middle market private debt, long-short liquid credit, long-only credit and commercial real estate debt. The company is an affiliate of Providence Equity Partners, a global sector-focused private equity firm that has invested in more than 150 companies and currently has $45 billion in capital under management in its equity and credit platforms.