What Are Non-Traded Business Development Companies?
Non-traded business development companies (BDCs) provide financing to small and medium start-up businesses that are unable to obtain financing through traditional means. They are usually these businesses’ last stop because they charge much higher interest rates than more traditional lenders.
BDCs are a significant topic of discussion in today’s investment landscape. These alternative investment vehicles provide crucial financing to small and medium-sized start-up businesses that often need help to secure funding through traditional avenues.
Unlike conventional lenders, non-traded BDCs typically offer financing at higher interest rates, positioning themselves as a last resort for businesses needing capital. While this may seem advantageous at first glance, investors should exercise caution. Non-traded BDCs often need more liquidity, meaning investors may face challenges accessing their funds in a timely manner.
Investors considering non-traded BDCs should carefully evaluate and weigh the associated risks against potential returns. While these investments can offer opportunities for growth, they also come with complexities that require thorough consideration.
Reasons Non-Traded BDCs Are Risky Investments
Non-traded BDCs have very high initial and ongoing fees.
Non-traded business development companies are speculative and illiquid investments with very high initial and ongoing fees, making it virtually impossible to make money from the investment.
First, the selling broker can receive up to ten percent of the investor’s principal investment as their commission at the time of the transaction and an additional two percent given to the dealer manager. Afterwards, many non-traded BDCs charge their investors fees in “two and twenty” structure.
Essentially, the BDC charges the investor a yearly fee of two percent of their entire investment and a 20 percent fee of any profits earned. Non-traded BDCs often charge investors highly high fees for the opportunity to invest with them.
Securities brokers who pitch these products to unsuspecting investors like to claim that these fees are inconsequential compared to the distributions they will receive. However, these distributions are dependent upon the company’s success.
Non-traded BDCs are not able to guarantee distributions to their investors.
Non-traded BDCs are inherently risky due to the nature of what they do. These companies invest in smaller businesses that traditional lenders reject. This is done with no real guarantees that the business they lend to will be successful enough to repay the loan.
Non-traded BDCs are not able to guarantee distributions to their investors. Thus, any guarantees they make qualify as misrepresentation. When a non-traded BDC experiences financial hardship, the investors not only have to watch the value of the investment drop, but they are also still required to pay management fees to the BDC.
Non-traded BDCs are illiquid.
In addition to the risk and the associated fees, non-traded BDCs are also highly unsuitable due to their illiquidity. These products do not trade on public securities exchanges; therefore, it is much more difficult for investors to liquidate their shares of a non-traded BDC should the need arise.
Those who control these business development companies want to ensure that investors exit the investment pool early enough. Because of this, most non-traded BDCs only offer investors quarterly buyout periods. However, they usually only provide a finite amount of buyouts each quarter.
If the number of investors looking to exit this investment exceeds the number of buyouts the non-traded BDC offers each quarter, then many investors will be stuck investing in a product they don’t want to be invested in anymore.
On top of all this, investors are often offered buyout prices significantly less than what they are told their shares are valued at.
Brokers Take Advantage of Investors By Recommending Unsuitable Non-Traded BDCs
Non-traded business development companies (BDCs) are tricky investments that aren’t a great fit for many investors, especially those who might need to get their money out quickly or prefer safer investments.
These investments tie up your money, making it hard to access when you need it. That’s bad news if you suddenly need cash or want to change your investment strategy.
But despite these downsides, brokers sometimes push these investments onto people who aren’t a good match. Why? Because they earn big commissions for selling them. This creates a conflict of interest, as brokers may prioritize their own profits over what’s best for the investor.
To protect yourself, it’s essential to understand these risks and carefully consider if a non-traded BDC is right for you before diving in.
If You Suffered Losses Due to a Non-Traded BDC – Contact Oakes & Fosher
Non-Traded Business Development Companies Attorney, Bruce Oakes
Oakes & Fosher dedicates its entire legal practice to helping investors across the nation. If you believe that your securities broker placed you in a highly unsuitable Non-Traded BDC, you may be entitled to damages. Contact our securities fraud attorneys at Oakes & Fosher for a free and private consultation.