With 13 private equity firms having filed to raise money for Business Development Companies in the wake of Apollo Management’s $930 million offering, and Blackstone expected soon, there’s been plenty of buzz about BDCs lately. But as more investors read the filings’ fine print, the appetite for these deals seems to be waning.
The filings submitted are plagued with problems, such as overreaching underwriter and management fees. The result is that the BDC shares will likely be worth significantly less than the IPO price, and very few of the participating firms have enough mezzanine experience to guarentee a positive return. Firms like Allied Capital and American Capital are constantly doing this, but it works for them because they are making sufficient returns to cover that shortfall. Will that strategy work for private equity firms that are new to the game, at a time where investors are already wary of the public stock markets?
Compounding these buy-side concerns are sell-side worries about a new type of “limited partner.” Private LPs have been known to complain, but they can’t compete with a vocal legion of spurned public shareholders, particularly if other BDCs follow Apollo’s lead in trading below IPO offering price.
Sarbanes Oxley is an additional hurdle PE firms are going to face, since one reporting mistake can put a company out of business. Not only must they hire compliance officers (Allied Capital and American Capital have entire departments), but they must also accept public scrutiny that they have largely been protected from.
But even if all these obstacles aren’t deterrents, the overriding question is this: Does this market really need more capital, especially from retail investors, who will be looking for the littlest misstep? It’s hard to answer yes’ to that.
As a final note on BDC’s, Gleacher Investment Corp., which filed to raise $550 million in an IPO, has tapped hedge fund veteran Bruce Ruehl as among the top two in command to manage the firm’s investments. His hiring, to some, may point to just how wide the investment mandate is for these vehicles. There has also been speculation that his hiring is a signal that the Gleacher BDC will also invest in hedge funds as a way to spur quicker profits to bridge the company to its slower materializing mezzanine returns.
In another convergence of private equity and hedge fund activity, I want to draw your attention to Ken MacFadyen’s story on the confluence of these two groups in debt restructuring situations (pg. 1). Increasingly, private equity firms and hedge funds are bumping heads in these restructurings, and by the looks of some new funds currently on the market, it appears that this space could get even more crowded soon.
Let me know your thoughts on BDCs and debt vehicles.