BDC are terrible investments and returns are pretty bad too, check out some reits.
I’m not qualified to fully answer all your questions, but I can speak to the demand for BDCs from broker-dealers. BDCs (and private REITs) were the darlings of brokers/advisors everywhere for the last several years. High yields, generally good ROI, and huge commissions for the advisor that their clients didn’t know about.
Now, with the new DOL regs (which were much less extreme than many expected, but still…) advisors aren’t going to touch illiquid alts (BDCs, REITs, etc.) with a 10 foot pole. That’s billions and billions of dollars no longer flowing into BDCs.
I’m sure there’s still a market for them. Maybe more on the ultra-high net worth/family office guys where they have the leverage to negotiate better rates, but the market is rapidly shrinking and many firms that focus on BDCs are going to close up shop.
So, if your job is dependent on the BDC market, I’d be worried (seriously, I’m not being hyberbolic). I go to a lot of conferences and every REIT/BDC wholesaler I talk to saw this coming a year or two ago and would fully admit they were going to ride the gravy train as long as they could. That officially ended yesterday.
^
to be clear, youre talking private REITS STL?
good stuff
That’s like saying MLP e&p works because reits work. Reits don’t exist to take credit risk (based on this thread I assume it’s high credit risk at that). I am not a reits expert, but I’m failing to see any connection besides they both pay out their earnings
Yeah, just private REITs. Those are probably the single shadiest product I’ve come across. The advisor gets a 10% rip up front and the client had no way of knowing about it. For example, an investor puts $100k into a private REIT, the advisor gets $10k immediately, and on the first statement the client receives it still says $100k even though there’s really only $90k there. WTF?
10%???
So you’re saying a major source of equity capital for BDC’s has basically evaporated with the recent regs? That regulation has that large of an impact? BDC’s themselves are dying?
When you say firms that focus on BDC’s are going to close up shop, you mean broker/dealers that were buying and selling them, not the BDC’s themselves? Am I wrong to think that well managed BDC’s still have access to equity and debt capital? Sorry to ask you to follow up but you made some very strong statements here.
On another note, I’m with geo on the infrastructure plays. Stick with quality (he mentioned a lot of it). Buy on pullbacks.
More seriously: MMP, EPD, CAFD. I know Tommy will agree with the former two, but the latter is interesting as well.
Yes, the DOL regs are a huge deal. They’re not as strict as many expected but it’s going to fundamentally change the way brokers/advisors do business. And it’s just the beginning of what is almost certainly more regulations to come. And, it’s not just fees. In the illiquid (and liquid to a lesser extent) alternative space, the SEC can and does audit advisors’ books and expects them to have performed significant due diligence on any “complex” investment they hold. They literally want to see hand written notes from on-site meetings and/or conference calls. It’s just not worth it anymore. Why would an advisor risk an SEC audit?
No, the broker-dealers are going to be fine. LPL (again, the largest buyer of BDCs) is absolutely fine. Their advisors just aren’t buying BDCs anymore - either during the intital funding stage or as a closed-end fund. It’s the BDCs themselves that are going to have a rough time moving forward. Initial funding is going to be much harder to come by so look for yields to go up. Maybe to the point where it’s no longer a feasible option for raising capital for small/medium sized companies.
The BDCs that exist and trade as closed-end funds are already hurting but they’ll probably run their course and be okay. But it’s not a good sign they’re trading at a discount to NAV. That’s lack of demand. Advisors just don’t want them on their books anymore.
Edit: I was just reading some more articles around the DOL regs (pretty much all I’ve done this week), and it appears as though non-traded (private) REITs are still going to be allowed in IRAs. That’s very unexpected. However, they are still subject to the “best interest standard,” which is going to be very hard to meet.
I like CAFD. Don’t own any yet, still working through some DD on it, but I could be a buyer there soon.
Everything thing STL mentioned is from a distribution and sales perspective. BDCs, like REITs, are just a regulatory structure that was intended to make it easier for smaller companies to raise money. Their leverage is limited to 2/1, much less than REITs, and all sorts of disclosure is required. Lots of level 3 valuations, but always done by an independent party. The assets they hold vary widely from BDC to BDC. They are no more an asset class than ETFs. Advisors making bank selling these things is a product of the distribution channels and its minions. There is nothing wrong with the BDC structure itself. Yes, some have high management fees and some have bad actors, like anything else. It takes a little bit of knowledge to navigate. For starters, never buy on the primary market, never buy above book value, and always require a higher discount given higher fees, which vary substantially. I don’t know why I bother to share. The more misinformation out there, the more I bank. And given the low liquidity, the prices get pushed around by rumor mongers and those with a little cash. All that means is more opportunity. BDCs as a class have recovered a bit, but they had been at record lows relative to book value. STL just might be the ultimate contrarian indicator, the perennial sales guy. I picked up a couple earlier in the year at a 40% discount to book. That has closed substantially. And just a warning, this is a very illiquid market. I’m not a big player by any stretch and it can take months for me to take a position without significantly moving the price. You’re welcome.
But REITs aren’t taking credit risk. Either you don’t understand why this is important or you are just not highlighting it in your example. In my experience, the market doesn’t care about credit until it is too late. I’m not interested in investing in something for 3 months, so I’m concerned about how they perform over a full cycle and not January - April of 2016. And you still haven’t addressed my hangup, although I’ve admitted I don’t know much about the BDC structure. I assume since the OP is looking for dividends, he is also looking for longer term holdings. BDC may be the best option for him, but I’m not convinced.
But I thank the omniscient God of BDCs took the time to write a condescending reply on the thread. Us mortals appreciate your presence and it has strengthened my faith. Halleajulah
Yeah, play quality. I like EPD. MMP is expensive but very solid. I’ll throw SXL and SE out there, too. Buy on pullbacks. Chasing yield is a big mistake with MLP’s; there are some bad actors in midstream and don’t fall for them unless you really know what you’re doing. I don’t really know those power companies that well – I think you know far more than me about CAFD.
I appreciate the commentary re: BDC’s. Even if STL is coming from a sales and distribution angle, it is important b/c BDC’s need to raise equity capital and it looks like a major source of that is going away.
I’m far from an expert on these, but paying above book value for them, at this point in the credit cycle, is a losing proposition. I bet there’s a lot of ticking time bombs in their portfolios. They note their individual investments in their 10-K’s and the interest rates they charge on their debt investments should tell you a lot about the credit quality of the borrowers. Some of them hold mezz debt and equity positions in structured finance vehicles. All of that stuff is going to be ugly when the credit markets inevitably turn sour.
If you can find a BDC that has good credit and capital markets people trading at a material discount to book value, by all means fire away. I’d just be weary of these. When the markets get bad, BDC’s will not be the place to be.
I’m a lot more comfortable not chasing yield and staying in U.S. bank preferreds.
Also, I like OKE and PAGP. You could make a case for their LPs, namely OKS and PAA, but given the yield spread is so small, I like being on the side of the insiders.
For BDCs, if they experience credit events, and have to lower distribution, wouldn’t that already be priced in? STL’s point is about the distribution system, but if it is a closed end company, why does that matter to the internal workings?
^^Good shout out for SE. I know it’s not a pure play GP, but nice to see no yield spread between it and its LP.
SO
I addressed that in my wall of text on the previous page. The gist of it is, if advisors are going to have illiquid alternatives on their books, they have to be able to show a very high level of due diligence was done on their part or the SEC will crush them. I realize there are other players aside from advisors in the market, but they’re a significant portion…perhaps the biggest. Going forward, they’re just not going to want to own them. Too much downside risk (regulatory, not performance).
And, yes, I’m obviously looking at it from a sales and marketing angle. The point remains, demand is drying up. That’s a fact. What’s that going to do to the market?
Yeah but why does it matter if the BDC doesn’t need to access the capital markets? It’s bad for the BDC sponsor, but why is it bad for the BDC investor?
For the individual investor, it may not be. So far I’ve been responding with the sponsor in mind, not the investor. If I went to a financial advisor that tried to sell me on BDCs, that’d be a huge red flag. I’d move on to the next guy.