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.
Non-Traded BDCs offered investors high yields over the last several years and the false sense of security of consistent valuations. This leads investors to believe their investment is stable when the market fluctuates. In order to provide these loans, most BDCs combine investor funds with borrowed money to allow it to expand its loan portfolio beyond 100% of investor assets to 120-130%. This increase in lending using borrowed money is extremely high risk and is certainly one of the primary factors leading to the massive losses investors will see from their BDC investments.
Commonly sold non-traded BDCs include those sponsored by Franklin Square (FS Investments) and the Business Corporation of America. If you or someone you know invested in BDCs as a result of the solicitation by your financial advisor or broker, please contact Stoltmann Law Offices for a no-obligation, free consultation with a securities attorney. Stoltmann Law Offices is a contingency-fee law firm, meaning if we do not recover any money for you, our services are free.