FS Investments, the leading sponsor of non-traded business development companies, took the first steps Monday that will lead to liquidity events for investors and the creation of a giant, $18 billion listed company.
First, FS, which launched its first non-traded BDC in 2009, said it will no longer work with longtime subadvisers to its funds, Blackstone Group's GSO Capital Partners. Instead, it will partner with KKR Credit Advisors, which is currently the adviser to one listed BDC, Corporate Capital Trust, with more than $4 billion in assets.
GSO subadvises four BDCs in the FS Investments fund family, one of which is listed and three of which are not. Combined, those four companies have roughly $14 billion in assets. When combined with KKR's Corporate Capital Trust, the merged BDC will have $18 billion in assets and be the largest BDC on the market. The transactions will provide liquidity to investors in the three non-traded BDCs with the FSIC brand, said Michael Forman, CEO and chairman of FS Investments.
"It's a two-step transaction," Mr. Forman said in an interview Monday morning. "First, we need to get shareholder approval for each of the funds, and that will take a few months. Then we have to merge the vehicles together and create the single company managing $18 billion. We need to get a liquidity event for FSIC shareholders and it makes sense to combine them all."
The scale of the new company translates into greater ability to borrow money at more favorable terms and reduce expenses, he added. The entire process could take 12 to 18 months.
Blackstone said in a news release that GSO will receive payments totaling $640 million from FS Investments, which are expected to be paid in 2018. The $640 million in cash proceeds represent approximately three years of revenue from the FS Funds, according to Blackstone, which will cease subadvising the funds in April and launch a new, direct lending business.
Corporate Capital Trust was a non-traded BDC that listed this year while FS Investment Corp. listed in 2014.
BDCs typically are closed-end investment companies that invest primarily in debt and equity of private companies. Yields can be attractive due to the BDCs' exposure to high credit risks amplified by leverage.
The change at FS Investments comes at a time when sales of BDCs are on track to decline for a third consecutive year and are on the way to posting their worst year for equity raising since 2010, when the product was just beginning to be widely sold by independent broker-dealers.
Non-traded BDCs managed to raise just $624 million over the first nine months of the year, compared with last year's 12-month sales total of $1.5 billion, according to Robert A. Stanger & Co., an investment bank that tracks the sales of alternative investments. Sales this year are far below the levels seen when the product was at its peak in 2014, when brokers sold $5.5 billion of non-traded BDCs, according to Stanger.
Like non-traded REITs, non-traded BDCs were high-commission products sold to investors seeking yields to build an income stream and typically paid advisers a hefty upfront commission of 7%.
Mr. Forman said that the new business relationship with KKR would be a partnership rather than KKR working as a subadviser. And he also praised GSO. "We started with GSO in 2008 and it has been successful for both our firms," he said. "We built something special and are proud of that and separating in a consensual manner."
"We thank FS Investments for their partnership over the years and wish them the best going forward," said Bennett Goodman, co-founder of GSO Capital Partners and senior managing director of Blackstone, in its release.
FS Investments also said Monday that it has entered into an agreement to form a joint venture with EIG Global Energy Partners to provide investment advisory services to the $4 billion FS Energy and Power Fund.
And it hired Andrew Beckman to lead the team primarily responsible for providing investment advisory services to FS Global Credit Opportunities Fund, a $2 billion closed-end fund.