In late 2015 Sankaty Advisors revealed it intended to launch a non-traded business development company (BDC).
The Boston-based firm was one of the last large, well-known mid-market lenders to hop on the BDC train, with most of its peers already managing or sub-advising such vehicles. Benefit Street Partners, Crescent Capital, Och-Ziff and Guggenheim Partners are among those building up BDCs.
But, with many BDCs trading at steep discounts to book value and a recent flurry of shareholder activism and lawsuits involving BDCs, there are still a handful of notable firms resisting the trend.
Oaktree Capital Management was reported to be considering a BDC in 2014, and while PDI understands that those plans have not been completely ruled out they have certainly died down. Highbridge Principal Strategies, Cerberus Capital Management and Lone Star Funds are also without BDCs – perhaps because the disclosures required of public companies don’t fit those firms’ private and guarded cultures.
Victory Park Capital and NXT Capital have also passed on the BDC opportunity. Victory Park’s management prefers the UK-domiciled investment trust structure, having raised one in 2015, while NXT’s chief executive Robert Radway told PDI that the 1:1 leverage limit on BDCs wasn’t his cup of tea.
It’s possible, however, that modifications in the BDC sector could prompt these firms to change tack.
For one thing, there is a bill being contested in the US Congress that would raise the leverage limit. Shareholder activism is also expected to boost the market as bad managers are forced to the face the consequences. Also, many of the firms submitting BDC filings tell PDI that they are hoping that BDC equity trading will have improved by the time they get through the Securities and Exchange Commission’s approval process.
However, it’s not easy to pull off a successful BDC launch and convince investors to keep equity trading at a premium, which affects a BDC’s ability to raise capital.
Would-be BDC managers should look at how some of the larger, successful BDCs have stayed on top. Most start out with a non-traded BDC, as Sankaty is doing. Another common factor is partnering with other managers on administration and fundraising, like the Franklin Square/GSO BDCs.
BDCs are generally known as a retail product, but institutions actually make up a large part of their shareholder base. And it’s not just the large mutual fund shops or hedge funds, some more traditional LPs are getting in the game, too. The Ohio State Teachers Retirement System and the State of New Jersey are some of the largest shareholders in TPG Specialty Lending.
Steve Nesbitt, chief executive of consulting firm Cliffwater, which advises many large US pension funds, recently told PDI that he would recommend BDCs to LPs because, in addition to performance on the lending portfolio, clients can also benefit from return on equity if the stock does well.
What does this mean for lenders looking to get in the BDC game? They will need to be creative to build scale.
Another question is whether more competitors will want to enter the sector. PDI once asked a manager what the attraction of permanent capital was. “Are you crazy?” they replied. “Because it’s permanent!”
On that basis, it’s hard not to think that Sankaty and co will have more BDC competition soon.