Non-traded business development companies had a record low raise with $112 million during the first quarter of 2018, which is on pace for a 48 percent decline from 2017, 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 bringing last year’s total to $840 million. This is a far cry from the 2014 peak when fundraising topped $5.9 billion.
Summit points to several factors contributing to the decline, including regulatory changes regarding share valuation and disruptions in the high yield debt markets that led to declining NAVs in 2015 and early 2016. Rising credit risk is an important factor that Summit believes will have a greater impact in 2018.
Summit also noted that many sponsors are shifting away from BDCs to closed-end fund structures for private credit investing. FS Investments, formerly the leading BDC sponsor, has shifted its focus to credit closed-end funds. The sponsor closed its last two non-traded BDCs at the end of 2017.
Reinvested distributions are currently the primary source of equity capital for BDCs, and quarterly share redemptions remained high at $170 million during the first quarter. Quarterly redemptions nearly doubled gross equity raised in the first quarter.
During the first quarter, Owl Rock Capital II was the top fundraiser with $60 million raised, followed by CION Investment with $22 million. Terra Income Fund 6 came in third with $9 million in equity raised.
Secured debt ratios for non-traded BDCs increased from 77 percent in the fourth quarter of 2017 to 78 percent in the first quarter, while first lien debt ratios remained unchanged from last quarter at 58 percent.
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 among non-traded BDCs ended their recent decline. Gross investment yields increased from 8.8 percent in 2017 to 9.1 percent in the first quarter of 2018.
Distribution yields declined to 6.9 percent in the first quarter, as several non-traded BDCs cut their distributions. Summit noted that additional companies could face distribution cuts in the future.
BDCs continued their two-year return declines during the first quarter. Net asset values had a 2.1 percent decrease in the quarter, after a 4.7 percent NAV decrease in 2017. With lower NAVs and lower distribution rates in the first quarter, total returns were a negative 0.1 percent. Total returns peaked in 2016 at 16.5 percent. Non-traded BDCs had a 6.2 percent average annual return over the last five years.
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.