Regulatory concerns for some business development companies are high on the agenda in 2017, especially as the US sees a changing of the guard in Washington. BDCs may expect less federal oversight, which would be a mixed bag for this type of mid-market lender.
Loosening statutes, such as those governing leverage, would be advantageous to BDCs, giving them more capital to put to work.
One key development in President Donald Trump’s transition is the nomination of Republican Rep. Mick Mulvaney to be his budget director. Mulvaney sponsored the legislation that would up the leverage limits for BDCs from 1:1 to 2:1, which a key congressional committee advanced in November 2015.
“The House Financial Services committee showed it’s very interested in easing capital raising,” Sutherland Asbill & Brennan partner Cynthia Krus says. “You have people in the higher levels of government who understand what a BDC is.”
Another Obama-era statute, the Department of Labor’s fiduciary rule – which specified who qualifies as a fiduciary for investment advice purposes under retirement plans governed by a landmark 1974 law – has hurt non-traded BDCs, adds Dechert partner Jay Alicandri.
The rule deals with, among other things, conflicts of interest a broker-dealer might encounter when receiving commission for purchasing shares in a non-traded BDC. These situations can also come up in the sale of shares in other non-traded registered closed-end investment companies, he says.
“The SEC has issued either exemptive rules or exemptive orders authorising those funds to issue multiple classes of shares, which allows those funds to offer no- or low-commission share classes to address the broker-dealers’ potential conflicts of interest. Unfortunately, the SEC has not yet provided similar exemptive relief to non-traded BDCs,” he adds.
Republicans, who now control all levers of the lawmaking process, have indicated they will take on the DoL’s fiduciary rule. They have also indicated the Dodd-Frank Act, which ushered in a new era of US federal oversight of the finance sector following the financial crisis, will also be in their crosshairs. In theory, a less robust regulatory regime would make it easier for banks to become larger players in the market.
“More competition, I think, would be the headwind. If leveraged loan limits are loosened or become more flexible, banks could come back. CLOs as well,” Krus says, though adding that firms are still working through the new requirements for CLOs.
Another trend Krus expects is for the size of BDCs to keep growing.
“I think you’re going to see the larger BDCs continue to get larger,” she says. “I do think you’ve seen that over the years. I think this is just a maturation of the BDC industry. I think you’re going to see other BDCs move toward this, whether it is through capital raises or strategic acquisitions.”
These indications aside, to some practitioners Trump is largely an unknown variable.
“I think one challenge is the overlay of the incoming administration in the US,” says Michael Ewald, chief executive of Bain Capital Specialty Finance. “It’s tough to discern what policies will be implemented. A lot of people are certainly sitting back and taking a wait and see approach.”