Non-Traded BDCs Post Lowest Quarterly Equity Raise in 5 Years

During the third quarter of 2017, non-traded business development companies posted their lowest quarterly capital raise in the last five years with $201 million raised, according to the latest BDC Market Snapshot issued by research and due diligence firm Summit Investment Research.

BDCs posted $673 million equity raised year-to-date in the third quarter of 2017, a 49 percent decline from the fundraising pace in 2016. After a record $5.9 million capital raise in 2014, non-traded BDC fundraising declined to $1.9 billion in 2016, which was a 68 percent decline in two years.

Regulatory changes with FINRA 15-02 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 affiliated companies. Summit also noted that rising credit risk had a negative impact on the space in 2017.

Summit mentioned that many sponsors are shifting away from BDCs to closed-end fund structures for private credit investing.

FS Investments (formerly Franklin Square), which has had the highest market share since creating the space, led third quarter fundraising with a 49 percent market share for its two open BDCs in the top two fundraising spots. FS Investment III was the top lifecycle BDC fundraiser with $59 million raised in 3Q17 followed by FS Investment IV with $38 million equity raised. Cion Investment Corporation took the third spot with $25 million raised.

With the recent decline in private debt market prices and higher market yields, Summit noted that non-traded BDCs have been able to obtain comparable secured debt at higher investment yields. Non-traded BDCs’ secured debt ratios decreased slightly from 74 percent in the second quarter of 2017 to 73 percent in the third quarter, while first lien debt ratios increased slightly from 51 percent in the second quarter of 2017 to 52 percent in the third quarter.

First lien debt ratios decreased from 7.9 percent in 2016 to 7.0 percent for the third quarter 2017 year-to-date. Second lien debt yields declined from 9.8 percent to 9.2 percent during the same period. With high yields and fixed interest rates on unsecured debt, non-traded BDCs posted gross yields of 9.2 percent year-to date in 2017.

Non-traded BDC net asset values decreased 1.7 percent year-to-date in the third quarter of 2017, after a 6.3 percent NAV increase in 2016. Total returns were 4.3 percent year-to-date in the third quarter, compared to 16.5 percent in 2016. Summit expects that non-traded BDCs will post moderate returns for 2017.

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.

Click here to visit The DI Wire directory page.