In boon to investors, largest business development company to merge or list.
Over the next nine to 18 months, the first-to-market nontraded business development company, the $2.5 billion FS Investment Corp., plans to complete a “liquidity event,” signaling the return of capital to investors.
FS had an offering price of $10.80 per share and its NAV was $9.97 at the end of last year, according to a company filing with the Securities and Exchange Commission. It has returned $5.80 per share in distributions or dividends to shareholders who bought the BDC when it was launched in 2009. It stopped raising equity capital last year.
“This is a real positive for the sake of the nontraded-BDC space,” said Bob Grunewald, chief investment officer of Business Development Corp. of America, a rival to FS.
A listing or merger will be encouraging, he said. “It would be wonderful for them to complete a public equity offering.”
The liquidity event most likely will be a listing on a national securities exchange, FS chief executive Michael Forman told investors in a conference call last week.
Listing the BDC will occur in the next nine to 18 months and perhaps sooner, Mr. Forman said. To increase yield and possibly increase distribution before a listing, its portfolio will transition to higher-yielding investments, Mr. Forman said.
“We expect our size, focus on senior secured debt, efficient operating cost structure, strong performance and the solid partnership between Franklin Square [Capital Partners] and GSO/Blackstone to be well-received by the public markets,” Mr. Forman added. He also said he does not expect any lockup period for investors, meaning they could sell their shares the day the company starts trading.
FS' move to a sale of assets or public listing comes only a few months after regulators warned broker-dealers about various risks of nontraded BDCs, including liquidity risk.
“Due to the illiquid nature of nontraded BDCs, investors' exit opportunities may be limited only to periodic share repurchase by the BDC at high discounts,” the Financial Industry Regulatory Authority Inc. warned in its annual list of regulatory and exam priorities that was issued in January. Other risks of nontraded BDCs that Finra highlighted were market, credit and leverage risks.
FS was launched in 2009 and was extremely popular with reps at independent broker-dealers who were seeking alternative investments for clients in need of income in a zero-interest-rate environment.
A half-dozen other nontraded BDCs have come to market in the wake of FS' success. Including FS, the BDCs have raised $3.4 billion in equity capital since 2007, according to a recent report by Wells Fargo Securities LLC.
BDCs typically are closed-end investment companies that invest primarily in debt and equity of private companies. Yields can be attractive due to the BDCs' exposure to high credit risks amplified by leverage, according to Finra.
