Non-traded BDCs are an investment structure that allow investors to access investments in small and medium sized businesses. They can be invest in equity or debt, and focus on providing long term capital gains or income. In practice most non-traded BDCs invest in credit and seek to provide consistent income. In recent years, there has been a surge in investor interest in NT BDCs.
Why should anyone invest in a non-traded BDC? Why not just invest in an exchange traded BDC. In this article, we outline five fundamental benefits that are unique to non-traded BDCs.
Access to Institutional Private Credit Strategies
Private credit can play an important role in portfolio construction by providing diversification, reducing volatility, and enhancing long term returns. However, traditionally many of the best private credit funds have only been available to institutions and large family offices. Private credit funds usually have minimums, high investor accreditation requirements, complicated tax forms, and limited liquidity. However a non-traded BDC makes this type of investment available to a wider audience.
Many non-traded BDCs allow investors to start with as little as $2,500. Unlike private placements, NT BDC investors receive simple 1099 tax filings. Furthermore, non-traded BDCs have more consistent liquidity options than private placements.
Capital Raise Across Market Cycles
The benefits of a continuous capital raise area s subtle and rarely discussed, yet we believe they are one of the key advantages of the non-traded BDC structure. The best opportunities to invest occur during moments of market panic. Yet during times of market panic, publicly traded BDCS generally trade at a discount to NAV. BDCs are forbidden from issuing new shares at a discount to NAV, so they will be cut off from raising capital at the exact moment that they have the best opportunities to invest. This phenomenon was readily apparent during the 2009 global financial crisis, and the 2020 Covid mini crash. In contrast, non-traded BDCS that continuously raise capital are able to deploy capital best when times are most favorable.
The unlisted BDC structure offers flexibility that traded BDCs don’t have.
The average investor return in a mutual fund is far lower than the actual return achieved by a mutual fund. How is that possible? Because retail investors too often react emotionally to market volatility, selling at the bottom, and buying at the top. The non-traded BDC structure puts in a barrier to slow down emotional reactions, potentially preventing their financial consequences.
Although non-traded BDCs offer some liquidity options(typically quarterly), the extra stop gap helps investors better manage emotions. This is also valuable for financial advisers trying to encourage prudent behaviour in their clients. With NT BDCs, investors are more likely to achieve the best possible returns from holding any given fund over a market cycle.
Long Term Emphasis
Managers of listed companies may talk about the long term, but in reality they are typically driven by short term share price pressure. In contrast, the manager of a non-traded BDC can focus on long term opportunities without the short term pressure of the stock price. As a result, an unlisted structure is a better fit for more complex, and potentially lucrative investment strategies.
Alternative investments have historically had a reputation for opacity. If you invest in a private equity fund or hedge fund, often you are unable to see specific details on underlying investments. However all NT BDCs are registered under the 1940 act, and consequently must provide regular updates in SEC filings. In fact, NT BDCs file the same quarterly and annual reports as publicly traded companies in the SEC’s EDGAR database
These public filings contain a wealth of information. Alternative.investments is a resource you can use to make the best use of it. Transparency is an important benefit of non-traded BDCs.