Articles Posted in BDC

Stoltmann Law Offices, P.C, a Chicago-based securities law firm specializing in representing investors nationwide, continues to hear from investors who have suffered devastating losses in alternative investments.  One of the most common and popular alternative investments peddled by brokers over the last several years are “business development companies” or “BDCs”. The most common issuer of BDCs is a company called Franklin Square, and brokerage firms have pushed hundreds of millions of dollars in these speculative investments to unsuspecting investors for a decade.

FSKR, the publicly-traded BDC called FS KKR Capital Corp. (NYSE: FSKR), was created by the merger of four Franklin Square non-traded BDCs in December 2019:

  • FS Investment Corporation II (FSIC II)

Chicago-based Stoltmann Law Offices, P.C. continues to see a surge of investor cases involving “alternative” investments like non-traded REITs, BDCs, oil and gas LPs, and other private placements. These “alts” are almost always considered to be on the speculative end of the risk scale, and frankly, they usually perform poorly and result in investor losses.

Alternative investments cover a wide variety of unconventional investment vehicles. They may employ novel or quantitative trading strategies or pool money for investments in commodities or real estate, for example. The one thing they all usually have in common is steep management fees along with commissions. Both expenses come out of investors’ pockets. Examples of alternative investments, or “alts” in industry parlance, include unlisted or “private” Real Estate Investment Trusts (REITs), private equity, venture capital and hedge funds. While they are generally sold to high-net worth investors who can afford to take on increased risk, they are usually illiquid and complex. Brokers who sell these vehicles may not fully disclose how risky they are. Most of these investments are unregulated, so supervision by regulators is typically light or non-existent.

Investors can file arbitration claims with FINRA if brokers sell inappropriate alternative investments to clients. A year ago, FINRA censured and fined the broker-dealer Berthel Fisher in connection with sales of “inappropriate” alternative investments. FINRA awarded six investors $1.1 million and fined the firm $675,000. Berthel Fisher has had a history of running afoul of investors and regulatory fines. In 2014, the firm was fined $775,000 by FINRA for “supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of non-traded real estate investment trusts (REITs), and leveraged and inverse exchange-traded funds (ETFs).” The firm was also selling managed commodity futures; oil and gas programs; business development companies; leveraged and inverse Exchange Traded Funds and equipment leasing programs.

Chicago-based Stoltmann Law Offices has represented investors who suffered losses in alternative investments like BDCs for many years.  Market fissures like the one impacting the markets now expose alternative investments for the speculative and unstable investments they truly are. For years, Stoltmann Law Offices has prosecuted cases against brokerage firms and advisors for selling these high-commissioned and unsuitable products to their clients. We approach these cases like the product-liability claims they truly are. These alternative investments have dozens of iterations. Private placements or all colors, limited partnerships, oil and gas drilling interests and partnerships, real estate investment trusts (REITs), and Business Development Companies (BDCs).

A BDC is a closed-end company that raises money for private businesses. They are basically banks for small companies that have poor credit profiles. They take in investor money and then lend it out to a portfolio of privately held businesses. The companies to whom investor money is lended to are typically not on the high-end of credit quality scale and typically seek funding through a BDC because more conventional funding is not available. So, these BDCs are speculative, high risk investments dependent exclusively on the underlying debt portfolio to make timely payments.  BDCs can be publicly-traded, non-traded, or private placement securities called “private BDCs“.

According to a recent article by InvestmentNews, BDCs, led by the largest issuer of non-traded BDCs, Franklin Square, are getting crushed by the recent bear market. That makes sense if you understand the structure of these products. If the success or failure of an investment is dependent on otherwise uncreditworthy companies paying interest and principal on loans, then any disruption in the economy can be devastating to that investment. Similar to how non-traded REITs were wiped out after the real estate crash and financial crisis, BDCs will face a similar fate in the coming economic malaise brought on by COVID-19.

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