‘Doesn’t Work’
Spokesmen for Bank of America Corp.’s Merrill Lynch and Wells Fargo said their companies don’t sell the funds. Morgan Stanley, owner of the world’s largest brokerage, has sold them on “rare occasions,” said Christine Jockle, a spokeswoman for the New York-based firm.
Stifel’s Ward also said he’s told his firm’s brokers to avoid the securities. Non-traded business-development companies invest mostly in corporate debt known as syndicated loans, which are also held in low-cost mutual funds, he said.
“Syndicated loans at that expense level, they just can’t deliver a quality return,” Ward said. “The math just doesn’t work.”
Business-development companies have been around since the 1980s. There are several listed on stock exchanges that don’t charge upfront fees and can be good investments, Ward said. The funds generally raise money from investors, borrow more and then lend it to smaller private companies.
‘Institutional Quality’
They’re able to charge high interest rates on the loans because the borrowers are generally rated junk, meaning at higher risk of going bankrupt, or don’t have ratings at all. The debt generally pays a floating rate, meaning investors will earn more if benchmark interest rates rise.
Franklin Square, run by Chief Executive Officer Michael Forman, 52, and real estate investor David Adelman, created the unlisted version in 2008, as brokers were raising billions of dollars selling another type of non-traded investment, real estate investment trusts.
“It’s really about bringing institutional-quality alternatives to the investing public,” Forman said in a phone interview. “Everybody wants to invest in alternatives.”
Franklin Square’s pitch is that the new structure allows investors who don’t have enough money to buy private-equity or hedge funds to diversify into loans to smaller companies, according to its website, which features an explanatory video illustrated with photos of a smiling couple hugging. The minimum investment is $5,000.