Timing is Everything – Schorsch is Opportunistic
Announced last week, Nicholas Schorsch’s RCS Capital Corporation’s (RCAP) acquired Validus Strategic Capital Partners (VSCP), which includes SC Distributors and Strategic Capital Advisory Services (collectively SC). The key component to this deal, was acquiring SC Distributors, a wholesale distributor of non-traded investment products, but why?
Schorsch and his team have been acquiring firms strategically over the past twelve months. Many of these firms were never for sale, but rather were targeted acquisitions.
For example, Cole Capital was approached by American Realty Capital Partners (ARCP) several times before a deal was struck.
Similarly, the Cetera broker-dealer network was not for sale. Schorsch visited Donald Marron, founder of private equity firm Lightyear, several times before making an offer he couldn’t refuse. RCAP, as of the end of April 2014, owns the Cetera network of broker-dealers.
Would-be home buyers search for sale listings and visit open houses, while real estate investors knock on doors seeking out opportunities not listed on the market like pre-foreclosures.
Was SC Distributors for sale or was Schorsch knocking on its door?
Nick Schorsch was not available to comment and calls to SC Distributors were not returned.
Mario Garcia Jr., CEO of the Validus Group, the seller in this transaction, declined to answer that question, amongst others, citing confidentiality agreements in place.
The Facts
On March 18, 2014, RCAP announced a wholesaling agreement with SC Distributors, in which they would manage broker-dealer and wholesaling responsibilities of RREEF Property Trust, Inc., a non-traded REIT that SC has been dealer manager for since December 2012. This is the only arrangement The DI Wire could find record of in which SC sub-contracted wholesaling responsibilities to a third party.
SC Distributors has operated at a loss since it became a FINRA registered broker-dealer in 2010. Each year, in order to fund operations, they have relied on capital contributions from affiliates, which presumably were Mr. Garcia and/or Validus.
According to its latest Focus Report, 2013 annual revenues were just shy of $61 million while expenses were over $64 million.
Distribution
SC currently acts as dealer manager for five offerings and also distributes Carter Validus Mission Critical REIT, Sierra Income Corporation, TriLinc Global Impact Fund, and Greenbacker Renewable Energy Company.
Its latest Focus Report reveals that 78% of 2013 revenue came from capital raising efforts for Carter Validus Mission Critical REIT, which is scheduled to close no later than June 6th 2014.
The remaining four offerings have not had much luck raising capital. See the chart below.
| Sponsor | Strategy | Escrow Break Date | Offering Size | Capital Raise |
| Sierra Income Corporation | Senior Secured Corporate Debt, Direct Origination | April 2012 | $1.5 billion | $249.2 million1 |
| RREEF Property Trust | Real Estate Securities, Diversified Core R.E. | May 2013 | $2.25 billion | $29.9 million1 |
| TriLinc Global Impact Fund | Global Impact Investments | June 2013 | $1.5 billion | $25.6 million2 |
| Greenbacker Renewable Energy Company | Renewable Energy Investments | February 2014 | $1.25 billion | $2 million3 |
1 – As of March 31, 2014
2 – As of May 9, 2014
3 – As of March 28, 2014
Carter Validus Mission Critical REIT II, Inc., a $2.25 billion offering, has registered with the SEC, but has yet to be declared effective. Filings show SC will act as dealer manager for this offering.
On top of operating at a loss and losing a major revenue driver, SC is also being sued for $10 million by O’Donnell Strategic Industrial REIT, Inc. (OSIR), a non-traded REIT it previously was dealer manager for. The complaint brings breach of contract, fraud, breach of fiduciary duty, and declaratory relief as the causes for action. SC disputes the claims and a hearing was scheduled for March 21, 2014 to review the status of the arbitration. The DI Wire was not able to obtain an update from this hearing.
Doug O’Donnell, CEO of the sponsor, The O’Donnell Group, Inc., declined to comment.
So why did RCAP make this purchase?
Simply put, diversification.
“The acquisition of Validus Strategic Capital Partners allows us to further diversify RCAP’s wholesale distribution platform with more institutional quality investment products which are not sponsored by AR Capital,” commented Executive Chairman of RCAP, Nicholas S. Schorsch in a statement.
RC Securities, RCAP’s wholesale broker dealer, currently distributes non-traded REITs, a non-traded BDC, and a closed end fund sponsored by AR Capital, LLC and other, non-affiliated entities.
According to an RCAP filing, capital raised in the U.S. single-tenant net-leased space of offerings sponsored by American Realty Capital consisted of 38% of the equity capital of non-traded REITs raised by RC Securities during 2013.
“In connection with the merger between American Realty Capital Properties, Inc., or ARCP, and Cole Real Estate Investments, Inc., or Cole, American Realty Capital and Mr. Schorsch agreed that neither American Realty Capital nor any of its affiliates, including Realty Capital Securities, will be permitted to sponsor or raise capital for any U.S. Net Lease REITs sponsored by American Realty Capital,” according to filings.
This does not prevent RC Securities from raising capital for U.S. net lease REITs sponsored by other unaffiliated entities.
However, Mr. Schorsch was quoted as saying ARC would leave the net-lease space, prior to the Cole transaction. Could the purchase of SC Distributors be an avenue of access to this space if viewpoints change?
Was SC an acquisition target all along or did their financials make them an opportunistic purchase?
