Articles Tagged with business development companies

shutterstock_128655458The securities lawyers of Gana Weinstein LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against broker Nancy Daoud (Daoud). According to BrokerCheck records Daoud is subject to 6 customer complaints. The customer complaints against Daoud allege securities law violations that including unsuitable investments and misrepresentations among other claims.   Many of the most recent claims involve allegations concerning non traded real estate investment trusts (Non-Traded REITs) and business development companies (BDCs).

As a background since the mid-2000s Non-Traded REITs became one of Wall Street’s hottest products. However, the failure of Non-Traded REITs to perform as well as their publicly traded counterparts has called into question if Non-Traded REITs should be sold at all and if so should there be a limit on the amount a broker can recommend. See Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part I

Non-Traded REITs are securities that invest in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. Non-traded REITs are sold only through broker-dealers, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

shutterstock_20354398The securities lawyers of Gana Weinstein LLP are investigating a complaint filed by The Financial Industry Regulatory Authority (FINRA) against broker Gopi Krishna Vungarala (Vungarala) and his brokerage firm Purshe Kaplan Sterling Investments (Purshe Kaplan). FINRA alleged that from at least June 2011 through January 2015, Vungarala regularly lied to his customer who is a Native American tribe regarding commissions paid to the broker and firm on non-traded real estate investment trusts (Non-Traded REITs) and business development companies (BDCs).

Vungarala served the tribe as both a financial advisor and was employed by the tribe as its Treasury Investment Manager and participated in decisions regarding the tribe’s investments. According to FINRA, Vungarala knew that the tribe prohibited employees such as Vungarala from engaging in business activities that could constitute a conflict of interest with the tribe. In order to induce the tribe to make purchases in Non-Traded REITs and BDCs in light of the prohibition against conflicts of interests Vungarala falsely represented to the tribe that he would not receive any commissions on the purchases. Despite the prohibition and the representations, FINRA alleged that Vungarala fraudulently induced the tribe to invest $190 million of dollars in Non-Traded REITs and BDCs without revealing that he and his firm received commissions on the sales at a typical rate of 7% generating $11.4 million in commissions for Purshe Kaplan of which $9.6 million was paid to Vungarala.

Worse still, FINRA alleged that the tribe was eligible to receive volume discounts on the products purchased but instead paid full commission. FINRA alleged that Purshe Kaplan’s supervisory failures led to the volume discounts not being applied. FINRA alleged that the tribe failed to receive more than $3.3 million in volume discounts and that these funds funds were instead paid to Purshe Kaplan and Vungarala in the form of commissions.

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.

shutterstock_64025263As one of the largest non-traded real estate investment trust (Non-Traded REIT) company, AR Capital, closes shop on new offerings, a growing non-traded product lines up to take retail investor’s money. Enter the non-traded business development company (BDCs). BDCs have been a growing asset class that markets itself to investors as a non-stock market, non-real estate, high yield alternative investment. 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, according 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.

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. Non-Traded BDCs offer investors similar risks as Non-Traded REITs including higher fees, less liquidity, and less corporate transparency. The major difference is that Non-Traded BDCs are regulated under the 1940 Act that governs mutual funds and that a BDC is valued quarterly.

The largest player in this 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 billion under management as of March 31, 2015. Other firms seeking to capitalize on the BDC wave including CNL Securities’ Corporate Capital Trust, ICON Investment’s CĪON Investment Corporation fund (CĪON); and American Realty Capital’s Business Development Corporation of America II.

shutterstock_92699377In our prior post we recently highlighted, the rising popularity of non-traded business development companies (BDCs). BDCs may be one of the latest and greatest products that Wall Street is promoting that will provide outsized yield with less risk. As usual, these “new ideas” end with brokerage firms making lots of money and investors suffering the consequences.

BDCs make loans to and invest in small to mid-size, developing, or financially troubled companies. BDCs now fill the role that many commercial banks left during the financial crisis to lend to those companies with questionable credit. While BDCs are not new products, until very recently investors had only publicly traded closed-end funds that acted like private equity firms to invest in. These funds are risky enough. During the last downturn some of the publicly traded funds fell by 60%, 70% or more.

Like their non-traded REIT cousins, non-traded BDCs utilize a non-traded REIT-like structure and promote very high yields of 10% or more. There are some differences between BDCs and REITs, BDCs are regulated under the 1940 Act that governs mutual funds. There is also a big difference in valuation. BDCs are valued quarterly while non-traded REITs publish their valuations no later than 18 months after the offering period.

shutterstock_57938968Since the financial crisis, the product development squad on Wall Street has been hard at work putting new spins on old ideas. The usual plan is merely to rebrand an old idea with a new label and convince investors looking for the latest and greatest product that the investment will provide outsized yield with less risk. It’s no coincidence that these new ideas make lots of money for the brokers selling them.

Enter the non-traded business development companies (BDCs). Now that many regulators and investors have begun to wise up and sour on the high commission and uncertain return approach offered by non-traded REITs, BDCs have entered into the fray as the non-stock market, non-real estate, high yield alternative. However, BDCs appear to be just as speculative – likely even more so – and inappropriate for most investors as non-traded REITs with many of the same failings such as obscenely high up-front fees, limited liquidity, and reliance on leverage to juice returns.

BDCs make loans to and invest in small to mid-size, developing, or financially troubled companies. 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. While BDCs are not new, until very recently the market has been served by publicly traded closed-end funds that act like private equity firms. Just like the market was served just fine by publicly traded REITs before the non-traded variety showed up on the scene. One would think that the publicly traded BDCs provided high enough returns and were risky enough for even the most speculative investor considering that during the last downturn some of the funds fell by 60%, 70% or more. But greed is good.

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