Non-traded business development company fundraising continued to drop in 2016, ending the year with $1.9 billion in sales, according to the latest BDC Market Snapshot issued by Summit Investment Research, a research and due diligence firm founded by Michael Stubben. During the fourth quarter of 2016, open non-listed BDCs posted their lowest quarterly capital raise since 2012.
Fundraising in 2016 was less than half of the 2015 sales total of $4.3 billion, and one-third of their 2014 peak of $5.9 billion. Regulatory changes with FINRA 15-02 and the Department of Labor’s fiduciary rule had a negative impact on the space, as well as the abrupt exit of the largest non-traded sponsor – AR Global – following a series of scandals at an affiliated company. Summit also pointed to disruptions in the high yield debt markets and its negative effect on net asset values, and noted that rising credit risk could continue to have a negative impact on the space in 2017.
Net asset values increased by 6.3 percent in 2016, after diving 12.5 percent in 2015. With the increase in NAVs and the high current distribution rates, Summit reported total returns of 16.5 percent in 2016 after two years of losses. Total returns in 2016 outpaced 2012 and 2013, which saw returns of 14.1 percent and 11 percent, respectively.
FS Investments, formerly Franklin Square, continued to lead fundraising efforts in the fourth quarter with 56 percent of market share for its three open non-traded BDCs. FS Energy & Power Fund was in the top spot with $92 million raised, while FS Investment Corporation III and FS Investment Corporation IV tied for second with a $49 million capital raise each. CNL’s Corporate Capital Trust came in third with $39 million raised.
Secured debt ratios continued to dip to 74 percent in the fourth quarter of 2016, compared to 75 percent in the third quarter and 76 percent in the second quarter. First lien debt ratios ticked up to 51 percent in the fourth quarter, compared to 50 percent for the second and third quarters of 2016. Summit noted that with the decline in private debt market prices and higher market yields, non-traded BDCs have obtained comparable secured debt and first lien debt at higher investment yields.
First lien debt ratios increased from 7.7 percent in 2015 to 7.9 percent in 2016, while second lien debt yields increased from 9.6 percent in 2015 to 9.8 percent in 2016. Non-traded BDCs increased their average gross yields to 9.4 percent for the fourth quarter.
Summit Investment Research has been active since April 2016 and covers non-traded REITs, business development companies, interval funds, and listed REITs (that acquired non-traded REITs or were once non-traded). The company’s research is utilized by financial advisors, registered investment advisors, broker-dealers, sponsors, service providers such as law firms, due diligence firms, industry organizations, and news organizations, and institutions.