Lawyers at Law Office of Christopher J. Gray, P.C. have handled many cases against stockbrokers and other investment professionals involving non-traded invesments such as REITs, hedge funds and private placements.
FS Energy and Power Fund (“FSEP” or the “Fund”) is a non-traded business development company that invests primarily in the debt of a portfolio of private U.S. energy and power companies. BDC’s have been around since 1980 when the U.S. Congress enacted legislation which ushered in certain amendments to federal securities laws allowing for BDC’s — which are simply types of closed-end funds — to make investments in developing companies and firms.
BDC’s are in the business of providing various debt and mezzanine financing solutions for typically small and medium-sized businesses that cannot access credit in the same way as larger, more established companies. By providing credit solutions to less established companies, BDC’s will frequently collect much higher than average interest income and seek to pass along such income to investors in the form of dividends.
While an investment in a BDC may seem like an attractive option for an investor seeking enhanced income, our office has all too frequently encountered situations in which money managers or brokers improperly recommended unsuitable “alternative” investment products to their clients, including such alternatives as non-traded REITs, as well as non-traded BDC’s such as FSEP.
Investors should understand that an investment in a non-traded BDC like FSEP carries many of the same risks associated with other non-traded investment vehicles. These risks include, but are not limited to: excessive front-end fees (as high as 10%) to the soliciting broker and his or her firm, in addition to liquidity issues. In fact, the Financial Industry Regulatory Authority (“FINRA”) has offered the following cautionary guidance in an effort to educate and inform investors of the liquidity concerns associated with investing in such an alternative investment product: “Due to the illiquid nature of non-traded BDC’s, investors’ exit opportunities may be limited only to periodic share repurchases by the BDC at high discounts.”
FSEP is managed by Franklin Square, a firm which specializes in alternative investment funds. As of September 2015, Franklin Square managed approximately $17 billion in total assets, including $15.7 billion in BDC assets, thus making Franklin Square the largest manager of BDC’s. A review of recent SEC filings indicates that FSEP closed its public offering in November 2016. According to FSEP’s most recently reported data, the Fund manages $4.4 billion in assets.
Investors who wish to sell out of their investment in FSEP are limited in their options due to the Fund’s illiquidity. For example, investors seeking to redeem their shares directly through Franklin Square need to wait until the Fund makes a quarterly tender offer, or wait until a future liquidity event transpires that may not occur for a number of years. While a secondary market to sell FSEP does exist, it is fragmented and relatively inefficient. Central Trade and Transfer recently listed shares of FSEP with a bid-ask spread of $6.60 – $6.85 per share.
The recent pricing in FSEP through Central Trade and Transfer suggests that investors in this non-traded BDC may well have suffered considerable investment losses of approximately 35% on their initial investment in FSEP at $10.00 per share.
If you have invested in FSEP, or another non-traded BDC or similar alternative product (such as a non-traded REIT) at the recommendation of a stockbroker or investment advisor, and you have suffered losses in connection with your investment (or are currently unable to exit your illiquid investment position without incurring considerable losses), you may be able to recover your losses in FINRA arbitration. To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at firstname.lastname@example.org for a no-cost, confidential consultation.