Non-Traded BDCs: Structure and Comparisons. February 16, 2012

Transcription

1 Non-Traded BDCs: Structure and Comparisons February 16, 2012

2 How Did the Non-Traded BDC Industry Develop? FS Investment Corporation launched the first nontraded BDC in 2008 that was largely patterned after non-traded REIT offerings Affiliated with GSO / Blackstone as investment sub-adviser Has raised approximately $1.5 billion through an initial public offering and follow-on offering Since the launch of FSIC in 2008, twelve other nontraded BDCs have filed registration statements with the SEC, three of which are currently offering shares. Non-traded BDCs have collectively raised over $1.63 billion since

3 Typical Non-Traded BDC Structure All the non-traded BDCs that are currently offering and in registration are externally managed Most of the non-traded BDCs are a combination of an investment sub-adviser and a distributor For example, GSO/Blackstone serves as the sub-adviser for FSIC, FSEP and FSIC II, while FS2 Capital Partners is the dealer manager.gso/blackstone otherwise has no affiliation with FS2 Capital Partners or the BDCs Also, KKR Asset Management is the investment sub-adviser for Corporate Capital Trust, while CNL Fund Advisors serves as the dealer manager VII Peaks Capital and KBR Capital Markets have a more traditional joint venture structure 3

4 Additional Requirements and Features of Non-Traded BDCs: Overview Suitability requirements May only be sold to investors who meet state suitability requirements FINRA review Like non-traded REITs, FINRA regulates non-traded BDCs under Rule 2310 State Blue Sky review Must be approved to sell securities in each state where solicitations will occur, requiring compliance with the NASAA Omnibus Guidelines Continuous offering over a period of time 497 supplement is filed regularly to report sales and investment portfolio Liquidity Event (not required) Typically complete liquidity event within five to seven years following completion of offering Liquidity event could include: (1) sale of all or substantially all of company s assets either on a complete portfolio basis or individually followed by a liquidation, (2) listing of company s common shares on a national exchange, or (3) merger or another transaction approved by company s board of directors in which shareholders receive cash or shares of a publicly traded company 4

5 Additional Requirements For Non-Traded BDCs: Blue Sky Laws NASAA Omnibus Guidelines: Sponsor Requirements Sponsor must have adequate experience and net worth (not required by NASAA REIT Guidelines) Limited indemnification of Sponsor, which may affect bylaws and/or charter of an issuer Suitability of Investors Default minimum suitability standards of either $70,000 gross income and $70,000 net worth or $250,000 net worth Suitability standards may vary across states Minimum investment amounts Suitability typically determined through subscription agreement 5

6 Additional Requirements For Non-Traded BDCs: Blue Sky Laws Fees, Compensation and Expenses Sponsor s compensation must be reasonable For BDCs, compensation presumptively reasonable if limited to participation in net gains of the issuer For Sponsor providing services to the issuer, fees must be competitive as compared to independent third-parties Offering document must estimate and itemize fees and expenses Conflicts of Interest Limitations on investing in joint ventures Issuer must have controlling interest No duplication of fees and each investor has right of first refusal to buy the affiliates interests in the venture Limited ability to invest in joint ventures or general partnerships with non publicly registered affiliates Multi-tiered arrangements permissible so long not designed to circumvent the Guidelines 6

7 Additional Requirements For Non-Traded BDCs: Blue Sky Laws Rights and Obligations of Participants (i.e. Stockholders) 10% holders have right to call stockholders meetings Majority approval of stockholders required to amend entity charter, dissolve the company, remove the Sponsor, elect a new Sponsor or approve the sale of substantially all of the assets of the company Stockholder right to inspect and copy the company s records, including stockholder list Reports to stockholders (e.g.,10-qs and 10-Ks) Distribution Reinvestment Plans ( DRPs ) may not charge sales commissions for shares issued under the DRP Stockholders must be able to elect or revoke participation in the DRP Stockholders participating in the DRP must receive current copy of the prospectus each time shares under the DRP are issued Broker-dealers responsible for ensuring participants in the DRP remain suitable to invest in the issuer 7

8 Additional Requirements For Non-Traded BDCs: Blue Sky Laws Redemptions/Repurchases Non-traded issuers typically offer to repurchase portion of outstanding shares on quarterly basis through tender offers either regulated by the Exchange Act or the 1940 Act Exchange Act tender offers have more flexibility but require greater cost to implement Current non-traded BDCs all intend to conduct tender offers under Exchange Act REITs received class exemption from Regulation M from the SEC for certain redemption plans BDCs may receive similar relief (FSIC did receive this relief) 8

9 Comparison Between Non-Traded BDCs and Non-Traded REITs 9

10 Comparison Between Non-Traded BDCs and Non-Traded REITs Although non-traded BDCs have many features in common with non-traded REITs, there are significant differences Fees and Compensation BDCs do not pay acquisition fees or any ongoing fees other than base management and incentive fees SEC has indicated it will no longer allow listing or liquidation incentive fees To date, all non-traded BDCs pay 7% selling commission and 2.75% - 3% dealer manager fee Industry Guide 5 BDCs are not subject to Industry Guide 5 and are not required to file quarterly post-effective amendments or submit marketing materials to the staff for review 10

11 Comparison Between Non-Traded BDCs and Non-Traded REITs (continued) DRP Shares Division of Investment Management does not view DRP issuances as sales, so DRP shares are not registered Prior Performance Not only is prior performance not required, but the SEC severely limits the performance disclosure that may be included State Review BDC offerings regulated pursuant to NASAA Omnibus Guidelines which is not tailored to BDCs NASAA expects to draft BDC Guidelines in the future SEC Review Division of Investment Management reviews BDC N-2 registration statements, not Division of Corporation Finance 11

12 Comparison Between Non-Traded BDCs and Non-Traded REITs (continued) 12 Valuation of Assets Offering Price Repurchases Liquidity Events Distribution Reinvestment REITS Not required during offering Generally static usually $10.00 per share regardless of NAV Redemption programs exempt from Rule 13e-4 of the Exchange Act that governs issuer tender offer; limits in the amount of shares that can be redeemed Generally list, merge or liquidate within anticipated timeframe following offering Yes (Shares registered) BDCs Yes, NAV computed quarterly as required by the 1940 Act Adjusts based on NAV, based on 1940 Act requirement that shares cannot be sold below NAV Tender Offers in compliance with Rule 13e-4 of the Exchange Act that governs issuer tender offers or Rule 23c-3 of the 1940 Act that governs tender offers by closed-end funds List, merge or liquidate within anticipated timeframe following offering Yes (Shares not registered)

13 Comparison Between Non-Traded BDCs and Non-Traded REITs (continued) REITS BDCs Taxation REIT under Subchapter M of the Code; requires 90% of REIT taxable income be distributed annually; subject to org. and ownership req., and asset and income tests RIC under Subchapter M of the Code; requires 90% of investment company taxable income be distributed annually; subject to diversification and income tests Blue Sky Regulation NASAA REIT Guidelines NASAA Omnibus Guidelines Investment Adviser Not required to be SEC or state registered Must be SEC registered investment adviser under Investment Advisers Act of 1940 Fee Structure Base Management Fees, Acquisition Fees, Property Management and Leasing Fees and liquidation or listing incentive fees Base Management Fees and Incentive Fees based on performance (typically 2% / 20% after a hurdle) 13 Regulatory Oversight Securities Act ( 33); Exchange Act ( 34) Securities Act ( 33), Exchange Act ( 34), and Investment Company Act of 1940

14 Questions? If you have questions about non-traded BDCs, please contact any one of us: Steven B. Boehm, Partner Cynthia M. Krus, Partner Harry S. Pangas, Partner John J. Mahon, Partner