Prospect Capital Highlights the Risks of Business Development Companies (BDCs)

shutterstock_89758564The securities lawyers of Gana Weinstein LLP are investigating investors that were recommended to invest in non-traded real estate investment trusts (Non-Traded REITs) and non-traded Business Development Companies (BDCs). Based upon the investor’s investment objectives and other information such investments may have been unsuitable for the investor. Recently, one publicly traded BDC has been under scrutiny, Prospect Capital Corporation (Prospect Capital) (Stock Symbol: PSEC). As the New York Times reported, in the last year and a half Prospect Capital’s stock price and net-asset value per share have been steadily sinking. Prospect Capital’s stock now has traded at discounts to net-asset-value of more than 30 percent this year.

As a background, BDCs have been a growing asset class that markets itself to investors as a non-stock market, non-real estate, high yield alternative investment. As we have reported in the past, BDCs make loans to and invest in small to mid-size, developing, or financially troubled companies either broadly or in a particular sector, such as oil and gas. BDCs have stepped into a role that many commercial banks left during the financial crisis due to capital raising requirements. In sum, BDCs lend to companies that may not otherwise get financing from traditional sources. However, BDCs appear to be just as speculative, suffer from high commissions and fees, and are inappropriate for most investors just like Non-Traded REITs. Indeed, to a Wealth Management Article front-end load fees on Non-Traded BDCs are typically around 11.5 to 12 percent. In addition, BDCs also usually have an incentive compensation following the “two and twenty” rule where the fund charges two percent of assets in management fees and 20% of capital gains based upon performance.

In the case of Prsopect Capital, some analysts have accused Prospect of charging conspicuously high fees even in the face of as investor returns. For example, Prsopect Capital paid its chief executive, John F. Barry III more than $100 million annually in recent years when the CEO of the largest internally managed BDC earned just $16.9 million in 2014. In addition, investors have accused Prsopect Capital because they claimed the firm inflates the fees it pays its management firm, Prospect Capital Management. Further, investors believe that Prsopect Capital trades at a 28 percent discount to net-asset value because of investor belief that the value Prospect Capital’s reported asset value may be inflated.

If these are the problems of publicly traded BDCs we can only imagine the issues with non-traded BDCs. As we have reported, the largest player in the non-traded BDC space is Franklin Square Capital Partners which manages multiple Non-Traded BDC funds including the FS Investment Corporation (FSIC) FS Investment Corporation II (FSIC II), FS Investment Corporation III (FSIC III), FS Investment Corporation IV (FSIC IV), FS Energy and Power Fund (FSEP), and FS Global Credit Opportunities. Franklin Square’s BDC assets were approximately $14.5 under management as of March 31, 2015. Other firms in the non-traded BDC market include CNL Securities’ Corporate Capital Trust, ICON Investmen’s CĪON Investment Corporation fund (CĪON); and American Realty Capital’s Business Development Corporation of America II.

The securities fraud lawyers at Gana Weinstein LLP represent investment customers who have suffered losses due to the inappropriate advice of their advisors. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.

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