Non-traded business development companies posted another fundraising decline in 2017 with $840 million equity raised, a 58 percent decline from $1.9 billion in 2016, according to the latest BDC Market Snapshot issued by research and due diligence firm Summit Investment Research. During the fourth quarter of 2017, non-traded BDCs raised a total of $215 million in investor equity.
Non-traded BDC fundraising in 2017 represents a nearly 86 percent drop from the 2014 peak when sponsors raised a whopping $5.9 billion. Summit points to a number of factors contributing to the drop, including changes to share valuation disclosures, high yield debt market disruption that led to declining NAVs in 2015 and early 2016, and rising credit risk.
Summit noted that many sponsors are shifting away from BDCs to closed-end fund structures for private credit investing.
FS Investments (formerly Franklin Square) led fourth quarter fundraising with a 46 percent market share for its two open BDCs in the top three fundraising spots. FS Investment III was the top lifecycle BDC fundraiser with $59 million raised during the quarter, followed by Owl Rock Capital II with $51 million. FS Investment IV took the third spot with $40 million, and Cion Investment Corporation came in fourth with $25 million raised.
Secured debt ratios for non-traded BDCs increased from 73 percent in the third quarter 2017 to 77 percent in the fourth quarter, while first lien debt ratios increased from 52 percent in the third quarter of 2017 to 58 percent in the fourth quarter.
With the 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.
Gross investment yields have continued a steady decline among non-traded BDCs, from 9.4 percent in 2016 to 8.8 percent in 2017. Distribution yields declined from 7.8 percent in 2016 to 7.6 percent in 2017, as several BDCs cut their distributions. Summit noted that additional companies could face distribution cuts in the future.
For 2017, non-traded BDCs had lower positive returns after record highs in 2016. Net asset values had a 4.7 percent decrease in 2017, after a 6.3 percent NAV increase in 2016. With lower NAVs and high distribution rates in 2017, total returns were a moderate 3.5 percent in 2017, which is well below 16.5 percent in 2016. Over the last five years, non-traded BDCs had a 6.2 percent average annual return.
Non-traded BDC net asset values decreased 4.7 percent in 2017, after a 6.3 percent NAV increase in 2016. With lower NAVs and high distribution rates in 2017, total returns were a moderate 3.5 percent in 2017, which is well below 16.5 percent in 2016. Over the last five years, non-traded BDCs had a 6.2 percent average annual return.
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.
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