Despite FS Investment Corporation II’s (“FSIC II”, or the “Company”) providing an estimated value of $8.31 a share, recent publicly-available information concerning pricing suggests a lower value, with secondary market transactions reportedly at prices of between $7.20 and $7.31 a share and a third-party tender offer being completed at $5.15 a share.
FSIC II is a publicly registered, non-traded business development company (“BDC”) that may have been marketed to some public investors as a relatively safe investment offering a steady yield of income. However, as a non-traded BDC, the Company carries with it considerable risks. Accordingly, in those instances where retail investors were solicited by a financial advisor to invest in FSIC II without first being fully informed of the risks associated with the investment, including the potential for principal losses, high upfront fees and commissions, and the illiquid market in the Company’s shares, investors seeking to recoup their losses may have legal claims against stockbrokers or investment advisory firms who sold them the shares.
Organized under Maryland law in July 2011, FSIC II commenced its operations on June 18, 2012 and is structured as a publicly registered, non-traded BDC under the Investment Company Act of 1940 (’40 Act). Publicly-available information suggests numerous retail investors participated in FSIC II’s initial offering, priced at approximately $10 per share. FSIC II is managed by FS Investments (formerly known as Franklin Square), a Philadelphia-based alternative asset management firm sponsoring a number of non-traded BDCs. As of June 30, 2018, FSIC II reported assets under management of approximately $4.77 billion.
As a BDC, FSIC II specializes in providing financing solutions to middle market private companies. Specifically, as set forth in certain SEC filings, the Company’s business model is aimed at making “debt investments in a broad array of private U.S. companies” with annual revenues of “$50 million to $2.5 billion at the time of investment.” By investing in smaller, private companies, BDCs like FSIC II can theoretically offer investors superior returns. However, such private-equity style investing is not without risk. These risks include reduced access to capital markets by the portfolio companies in which the BDC holds investments, as well as less transparency and information in these portfolio companies than is typically provided by publicly traded companies.
Furthermore, as a non-traded investment vehicle, FSIC II is illiquid and shares cannot be readily sold on a national securities exchange. Thus, investors seeking liquidity are restricted in their options. One option available to investors is to sell their shares back to the Company, although FSIC II’s Share Repurchase Program is only available on a quarterly basis, and further, redemptions are limited as to the number of shares the Company will redeem at a given time (based on an internal formula).
Because there is not an established, liquid public market in FSIC II’s shares, investors seeking immediate liquidity may elect to participate in a tender offer by an institutional, third-party investor. Alternatively, investors may seek to sell their shares on a limited and fragmented secondary market. Unfortunately, in either scenario, investors may learn the share pricing through a tender offer or by selling on a secondary platform is often disadvantageous, with shares selling at a substantial discount to FSIC II’s stated net asset value (NAV).
Through an SEC filing on August 20, 2018, MacKenzie Capital Management (“MacKenzie”) disclosed its purchase of a total of 47,474 shares pursuant to a tender offer, priced at $5.15 per share. Based on FSIC II’s approximate $10 offering price, investors who participated in this tender offer appear to have sustained significant principal losses approaching 50% (excluding distributions). Additionally, recent secondary market pricing suggests FSIC II investors seeking near-term liquidity may have sold at prices ranging from $7.20-$7.31 per share – substantially below FSIC II’s most recent stated NAV of $8.31 per share.
The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience representing investors in connection with complex non-conventional investments, including non-traded BDCs and REITs. Investors may contact us via the contact form on this website, by telephone at (866) 966-9598, or by e-mail at email@example.com for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York and Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).