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Publicly Traded Private Equity

Focused on developments in the Business Development Company (BDC) industry

Eversheds Sutherland has developed a substantial BDC and alternative assets practice focused on facilitating access to the public capital markets for private equity managers. We have the breadth and depth to complete complex transactions efficiently, and we have the capacity to serve the ongoing needs of these regulated entities, their management teams and advisers, including:

  • fund formation and initial public offerings;
  • accessing debt and equity capital markets through shelf equity offerings, convertible private debt offerings, public debt offerings, rights offerings and tender offers;
  • structuring and formation of financing vehicles, including SPVs and CLOs; providing counsel to the Board and its independent directors;
  • developing and reviewing compliance programs;
  • providing counsel at the time of an SEC exam;
  • developing investment advisory fee structures;
  • providing RIC tax guidance;
  • preparing exemptive applications and other regulatory relief;
  • structuring complex portfolio company acquisitions and dispositions to meet regulatory requirements;
  • managing all aspects of strategic transactions with other regulated entities;
  • and much more.

Eversheds Sutherland has been at the forefront of regulatory activity at the SEC, SBA and IRS impacting the alternative assets industry for over 20 years. We focus on developments in the industry affecting internally and externally managed business development companies (BDCs), including traded, non-traded and private BDCs, small business investment companies (SBICs), and other structured vehicles including special purpose acquisition vehicles.

As a leading firm representing BDCs and their underwriters nationwide, Eversheds Sutherland established the annual BDC Roundtable  in 2002 for the benefit of the whole industry.

If you'd like to learn more about Eversheds Sutherland's BDC and alternative asset practice, please contact us.

BDC Industry Snapshot

The BDC industry has enjoyed sustained growth over the last decade. As of December 2023, there were:
  • 46 traded BDCs
  • 25 non-traded BDCs
  • 80 private BDCs

BDC Roundtable

Eversheds Sutherland founded the BDC Roundtable in 2002 to provide a forum for the industry to come together to address common matters related to the structure of business development companies. The BDC Roundtable gatherings are open to all BDC management teams as well as those that are exploring the structure and would like to learn more.

Annually, the BDC Roundtable includes a two-day conference to discuss recent developments in the industry, including relevant exemptive applications and orders, SEC Staff comments and positions and unusual structures and new offering terms. In recent years, members of Congress and the SEC Staff have attended and spoken at the BDC Roundtable along with other industry service providers including investment bankers, valuation firms and accounting and tax experts.

The 2024 Roundtable will be held on September 17 – 18 in Washington DC, and registration will open in Summer 2024. To request an invitation, or suggest topics for future Roundtables, please contact us. 

Structures

Every investment vehicle has its own structuring challenges and operating requirements. We can assist management teams and investment advisors on which structure may be most appropriate based on the specific business model of the issuer.

Business Development Companies (BDCs)
As investors seek more yield-oriented investments, business development companies have become increasingly popular, particularly for asset managers who can seed a new portfolio with performing investments. Given the uncertainty of the capital markets, more managers have begun exploring the non-traded BDC, which is sold through broker-dealer channels similar to non-traded REITs, and the institutional private BDC, which is typically launched by a manager with access to qualified and accredited investors and is sold through a private placement.

Small Business Investment Companies (SBICs)
While SBICs have been around since 1958, the popularity of this Small Business Administration program has recently surged, and more funds than ever, particularly BDCs, are establishing SBICs or converting SBICs into the BDC structure.

Alternative Asset Vehicles
The capital markets continue to develop creative solutions to financing and structuring challenges, including numerous forms of structured vehicles. Such vehicles may take the form of a special purpose vehicle (SPV) controlled by a parent entity that holds certain assets, or a joint venture fund, where two parties each contribute assets to and control the JV vehicle, which typically provides loans to third-party borrowers. Managers are also exploring the opportunities presented by closed-end funds, non-traded closed-end funds, and interval funds to meet their strategic business goals.

Business development companies (BDCs) were created by the Small Business Investment Incentive Act of 1980, which amended the Investment Company Act of 1940 (the 1940 Act). A BDC is a closed-end fund that is required to invest at least 70% of its assets in private or thinly traded public companies in the form of long-term debt and/or equity capital, with the goal of generating current income and/or capital gains.

BDCs may be internally managed, or they may be externally managed by a separate registered investment advisor. Over 90% of the BDCs operating today are externally managed, and nearly all newly filed BDCs are structured to be externally managed.

BDCs generally qualify to elect to be taxed as “regulated investment companies” under Subchapter M of the Internal Revenue Code for federal tax purposes, which regulates, among other things, the type of income the BDC may generate and the distribution of its net income to shareholders.

BDCs maintain a hybrid structure that captures elements of both funds and corporate registrants. Like all closed-end funds and mutual funds, BDCs are regulated by the Securities and Exchange Commission (SEC) under the 1940 Act, which requires, among other things, certain restrictions on the use of leverage and significant disclosure about the BDC’s investments, operations, and management, and prohibits many types of joint and affiliated transactions. Like traditional corporate registrants, BDCs file periodic reporting on 10-Qs, 10-Ks and current reports on 8-Ks with the SEC.

Generally, BDCs are either traded, non-traded or private. Both traded and non-traded BDCs offer securities in transactions that are registered under the Securities Act of 1933; however, traded BDCs list their securities on a national securities exchange and non-traded BDCs do not. Non-traded BDCs, a structure that non-traded REITs have used for years, permits the BDC to raise capital in a continuous private offering and eliminate price volatility, but this also limits liquidity and the retail investors to whom the BDC can market. Many non-traded structures provided mechanisms for liquidity after a certain hold period. Private BDCs do not list their securities on a national securities exchange and only offer their securities in transactions that are exempt from the registration requirements of the 1933 Act. The private BDC structure provides the additional advantages of optionality and efficiency.

Benefits of the BDC

One of the key benefits of all BDCs relative to private funds is the ability to access public retail investors, since private funds are generally restricted to marketing to only qualified or accredited investors. In exchange for access to this substantial pool of investing capital, BDCs are regulated by the SEC under the provisions of the 1940 Act. The 1940 Act provides important protections to retail investors, including restrictions on the use of leverage.

Retail investors control an important component of the public equity capital markets and can provide a “stickier” investor base, as compared to institutional investors, because retail investors tend to hold shares longer, appreciate current income from dividends, and can be less reactive to news (good or bad), which can provide some stability to the stock in volatile markets. A strong investor base has components of both institutional and retail investors.

In recent years, the majority of newly formed BDCs have been structured as private BDCs. From 2016 through 2022, 73 of the 87 BDCs that have been formed commenced operations as private BDCs. The process to launch a private BDC is potentially shorter than that to launch a traded or non-traded BDC, and there is no need to list the private BDC’s shares on an exchange or to complete the “blue sky” registration process applicable to non-traded BDCs conducting a continuous offering. The private placement process may be less costly because it does not involve underwriters, a roadshow or the "blue sky" process. In addition, the private BDC structure is also generally attractive to foreign investors and does not need to be formed with separate investment vehicles for onshore and offshore investors.

To learn more about BDCs, please view our "ABCs of BDCs" presentation.

A small business investment company (SBIC) is a privately owned and operated company that makes long-term investments in US-based small businesses and is licensed by the US Small Business Administration (SBA). The SBIC program was created in 1958 to fill the gap between the availability of venture capital and the needs of small businesses in start-up and growth situations. Historically, the SBIC program has granted licenses to existing fund structures, including business development companies (BDCs), and has granted SBIC licenses to a number of wholly owned subsidiaries of public BDCs.

The SBA presently provides financing to SBICs through the use of loans, or debentures. Debentures are issued by SBICs to the SBA that have interest payable semi-annually and ten-year maturities. The interest rate is established when issued and is based on the 10-year Treasury rate plus a market-driven spread. An SBIC may invest only in "small businesses," and must invest at least 25% of its invested funds in "smaller enterprises" as defined by the SBA.

In December 2015, Congress authorized SBA-guaranteed debentures that affiliated SBIC funds can have up to $350 million outstanding, subject to SBA approval. In 2018, the Small Business Investment Opportunity Act increased the maximum amount of leverage available to a single SBIC from $150 million to $175 million. In addition, The American Recovery and Reinvestment Act of 2009 allows for existing SBIC-licensed entities to obtain a second license and gain access to additional leverage of $75 million, for a maximum of $225 million combined SBIC leverage (subject to additional required capitalization of its second wholly owned SBIC subsidiary).

As Congress continues to seek ways to stimulate the American economy, additional increases in the available capital to SBICs continue to be discussed.

Special purpose vehicles (SPVs) are often established for the purpose of holding specific assets in connection with a secured financing transaction, or in other situations when certain assets are required to be segregated from other assets. These may be consolidated or not consolidated for GAAP purposes, depending on the facts and circumstances of the arrangement. Importantly, the SEC staff has looked closely at the leverage taken on at the SPV level by BDCs, particularly those that are not consolidated for GAAP purposes, and has suggested that some BDCs may be using these vehicles to permit additional leverage within the structure beyond the 1:1 debt-to-equity level, which might be considered a violation of Section 48 of the Investment Company Act of 1940. Issuers are cautioned to consult counsel on the formation, structure and control of SPVs within the BDC model.

Special purpose acquisition companies (SPACs) were originally developed as an alternative to traditional acquisition vehicles, due to their ability to raise capital through the public equity markets. SPACs are shell companies that have no operations but go public with the intention of merging with or acquiring a company using the proceeds of the SPAC's initial public offering (IPO). SPAC offerings are commonly sold in $8–10 units, which consist of one common share and one warrant and they trade as units and/or as separate common shares and warrants on a national exchange. The public currency is intended to enhance the position of the SPAC when negotiating a business combination with a potential merger or acquisition target, and also provides trading liquidity for its investors. SPACs are not subject to the Investment Company Act of 1940, so they have greater operational flexibility. Although SPACs have receded in popularity since 2021, the SPAC structure remains a potentially attractive vehicle for private equity managers to seek public capital for targeted acquisitions.

Registered Closed-End Investment Companies (CEFs) are a classification of investment companies registered under the Investment Company Act of 1940 (the 1940 Act). Unlike open-end funds, the securities issued by CEFs are not redeemable, meaning that they cannot be sold back to the fund upon the shareholder’s request. Nonetheless, CEFs may institute a share repurchase program and periodically offer to repurchase shares by conducting tender offers. In a number of instances, there are differences in the substantive regulation of CEFs and open-end funds. For example, CEFs are permitted to invest in a greater amount of “illiquid’ securities than open-end funds.

CEFs offer various distinct advantages to investors, such as:

  • Investment advisers can manage a more stable asset base because CEFs generally raise a fixed amount of capital through their initial public offering, which allows the portfolio managers to more effectively accomplish their stated investment objectives without managing redemption requests;
  • Greater flexibility to invest in less liquid securities compared to open-end funds because CEFs generally do not need to maintain liquidity to meet daily redemption; and 
  • More regulatory flexibility to leverage their investments by borrowing capital or issuing preferred stock compared to open-end funds.

Interval Funds are closed-end investment companies registered under the 1940 Act. Like all closed-end investment companies, the securities issued by interval funds are not redeemable; however, in order to operate as an interval fund, interval funds are required to adopt a fundamental policy to repurchase their shares, at a price equal to net asset value (NAV), from shareholders at periodic, pre-determined intervals in accordance with the 1940 Act (once per year, twice per year or four times per year). Each repurchase offer must be for no less than 5% and no more than 25% of the fund’s outstanding shares. It is this regulatory “guarantee” of liquidity, including with respect to the sale price (i.e., at NAV), that differentiates interval funds from other registered closed-end funds and business development companies.

Other key considerations in managing an interval fund include:

  • Easier and more efficient distribution method of interval funds through electronic platforms (referred to as “point and click”) without the use of written subscription agreements;
  • FINRA does not review the registration statement;
  • Process for automatic effectiveness of subsequent registration statements and post-effective amendments; and
  • NAV of interval funds, as a practical matter, must typically be determined daily because they are typically offering and selling their securities on a daily basis.
 
Compliance

BDCs are closed-end investment companies that have elected to be regulated as BDCs under the Investment Company Act of 1940, and are therefore regulated by the SEC under the Investment Company Act of 1940 (1940 Act), and are required to comply with Rule 38a-1 under the Investment Company Act, governing compliance programs for investment companies.

Externally managed BDCs must be advised by a registered investment adviser under the Investment Advisers Act of 1940 (Advisers Act), including Rule 206(4)-7 under the Advisers Act. Unlike other investment companies, BDCs function like traditional operating companies and are also subject to the Securities Act of 1933, the Securities Exchange Act of 1934, and the listing standards of the national securities exchange on which their shares of common stock are listed, if any.

Due to the panoply of rules and regulations with which a BDC must comply, maintaining compliance with the federal securities laws and exchange listing standards requires a comprehensive compliance program that is diligently administered. We have worked with many BDCs to develop and maintain comprehensive compliance programs. We have significant experience in the following areas of compliance:

Rule 38a-1 requires, among other things, that a BDC:
  • appoint a chief compliance officer (CCO);
  • develop, maintain, and test a compliance program encompassing all rules and regulations under the relevant securities laws, including:
  • code of ethics and business conduct policy;
  • personal securities holdings procedures;
  • valuation policy and related documentation;
  • custody/safekeeping procedures;
  • Section 57 screening procedures for joint or affiliated transactions;
  • disclosure policy and procedures;
  • proxy voting policy;
  • document retention program; and
  • have the CCO present a CCO report to the Board of Directors at least annually to report findings, and assess the overall effectiveness of the compliance program.
BDCs are also required to file periodic reports under the Securities Exchange Act, including 10-Qs, 10-Ks, 8-Ks and proxy statements.
BDCs and their advisers have an obligation to protect their customers’ privacy and to maintain control and integrity of their financial information. This obligation extends not only to internal systems but oversight of any third-party vendors who have access to the BDC's data. Visit Eversheds Sutherland's Data Privacy Security and Technology practice webpage to learn more.
BDCs are subject to the various rules and additional disclosure obligations promulgated under the Sarbanes-Oxley Act of 2002, including the establishment of:
  • an internal audit function, including management's assessment of its effectiveness, and an opinion of the issuer's auditors as to its effectiveness; 

  • a whistleblower policy and procedures; and

  • a retention program for audit documentation.

Registered Investment Advisors (RIAs) are subject to compliance with Rule 206(4)-7 under the Advisers Act, which has similar requirements to Rule 38a-1, but also requires, among other things:
  • filing and ongoing maintenance of Form ADV, the primary public disclosure document for RIAs; 

  • determination of investment adviser representatives, if applicable, and determination of supervisory procedures; 

  • trading policy; 

  • best execution policy; 

  • advertising procedures; 

  • oversight of "pay to play" activities; and 

  • oversight of compliance of pooled investment vehicles.

BDCs and RIAs are subject to routine SEC examinations, which may occur as often as every three years. Be ready by making sure all compliance program documentation, including all policies and procedures, is regularly updated and all testing data and evidentiary documentation is readily available, with the last year of documentation on site, and the last five years of data easily accessible within 24 hours. We can help you conduct mock exams and have guided many clients through the examination process.
Eversheds Sutherland has also worked with many service providers to the BDC, SBIC and alternative assets industry and would be happy to make recommendations for:
  • compliance consultants;

  • valuation professionals;

  • investment banking professionals;

  • auditing professionals;

  • financial printing firms;

  • insurance brokers; and

  • transfer agents.

Transactions

Eversheds Sutherland has advised many BDC clients or their underwriters in connection with debt and equity capital-raising transactions involving IPOs, secondary equity offerings, private placements, public and private bond offerings, convertible debt, rights offerings and tender offers. Since the beginning of 2006, Eversheds Sutherland has been involved with various offerings for BDCs totaling over $80 billion of capital. Please review our list of representative transactions, and let us know how we can work with you or your advisors to meet your capital raising objectives.

Given the unique regulatory and tax attributes of BDCs, mergers, acquisitions and strategic transactions involving BDCs can entail multifaceted tax, accounting, and regulatory issues. We have been involved in many of the merger/acquisition transactions involving BDCs, and can help you cut through the complexity. 

In addition to advising clients regarding transactions and regulatory matters, Eversheds Sutherland has extensive experience representing BDCs in connection with portfolio company-related transactions, including transactions involving senior and subordinated debt, common and preferred equity, convertible securities and "control" transactions. Because of the unique nature of BDCs and the regulations that apply to their operations and investments, portfolio company investments must be structured in a way to allow the BDC to comply with various BDC and IRS rules, as well as regulations related to holding interests in broker-dealers and investment advisers.

 

Corporate Governance and Board Counsel

Eversheds Sutherland regularly serves as counsel to the independent directors of fund complexes of all sizes, including for some of the largest BDC platforms. Among our primary functions, we advise independent directors on carrying out their duties and responsibilities under federal and state laws, on matters relating to board governance and best practices, and on their duties under the Investment Company Act of 1940. 

For these clients, we have recently acted as:

  • Independent counsel in regulatory enforcement actions;
  • Board counsel; and
  • Transaction counsel.

In addition, our attorneys assist boards and their independent directors with their annual 15(c) contract approval process and provide advice on topics such as risk management oversight, cybersecurity, and directors and officers insurance policies.

We represent independent directors and special committees of boards of directors in a broad range of conflict transactions requiring independent counsel, including proxy conflicts, mergers and acquisitions, transactions with controlling shareholders, and other related-party transactions or dealings. We regularly advise the Boards of BDCs and other closed-end funds on a variety of shareholder activism matters. We can help Boards better understand trends in shareholder activism and their susceptibility to activist campaigns, and craft policies and practices to mitigate activist threats. In an increasingly complex and polarized environment, Eversheds Sutherland guides clients through sophisticated activist challenges at all phases, leveraging our PR, IR and legal know-how to defend against them. Our corporate governance, securities, transactional and litigation teams provide an integrated approach to delivering comprehensive, practical and effective solutions for the full range of business and legal issues that may arise.

 

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