If you don’t feel like a Muppet for buying a business development corporation private placement, you should – because there is most definitely a hand up your ass.
It is astounding to me, after all we’ve been through, that there are still enough gullible people with investable assets left to support this kind of “product”.
What is a Business Development Corporation (BDC)? Basically, a collection of risky loans to private companies with a management team attached that supposedly has some sort of expertise in doing the right deals. And perhaps they do – but with the fees and commissions associated with the latest wave of non-traded, private versions, you’ll never know it.
Zeke Faux is out with a blockbuster story at Bloomberg right now that you simply must read in order to believe that this is a thing that actually exists…
Sales of junk-rated debt funds known as non-traded business-development companies doubled to a record $2.8 billion last year…
investors generally pay 2 percent management fees and about 20 percent of returns…
Non-traded business-development companies on average have generated $2.40 in fees for every $1 in profit delivered to investors
“Syndicated loans at that expense level, they just can’t deliver a quality return…The math just doesn’t work.”
So let’s hit our Murder Hole checklist:
Exorbitant, borderline absurd fees to management? Check!
Monstrously large, slightly hidden commissions to the brokers who sell the product?
Illiquidity and opacity? Check!
Bizarre asset class that historically has been totally unnecessary for a majority of investors? Check!
Marquee-name involvement from larger institutions lending the whole mishegoss an air of prestige and exclusivity? Check!
Promises of non-correlation and diversification that exist only in a fictional world? Check!
Looks like we’ve hit all the right boxes. Be sure to gobble this shit up as fast as they can make it.
No one learns anything.