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Liquidity Options are Limited for FS Energy and Power Fund Investors

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Oil Drilling RigsInvestors in FS Energy and Power Fund (“FSEP” or the “Company”) will likely encounter difficulty in selling out of all or a substantial portion of their FSEP position, in the event they seek to redeem their shares directly with FSEP’s sponsor, Franklin Square.  Headquartered in Philadelphia, PA, FSEP was formed as a Delaware Statutory Trust in September 2010, and subsequently commenced its investment operations on July 18, 2011.  Structured as a regulated investment company, or RIC, for federal tax purposes, FSEP qualifies as a business development company (“BDC”) under the Investment Company Act of 1940.

Upon information and belief, as a publicly registered, non-traded BDC, FSEP was marketed and recommended to numerous retail investors nationwide.  As set forth in its most recent quarterly 10-Q as filed with the SEC, “The Company’s investment objective is to generate current income and long-term capital appreciation by investing primarily in privately-held U.S. companies in the energy and power industry.”

As we have highlighted in recent blog posts, BDCs have been around since the early 1980’s, when Congress first enacted legislation amending federal securities laws allowing for BDCs — which are simply types of closed-end funds — to make investments in developing companies and firms that would otherwise have difficulty accessing financing.  Because they provide financing solutions for smaller, private companies, BDCs have been likened to private equity investment vehicles for retail investors in various marketing pitches by BDC sponsors and the financial advisors who recommend these financial products.

BDCs characteristically offer high yields to investors, both as a function of their collecting much higher than average interest income on loans to more thinly capitalized businesses, as well as their use of internal leverage.  In light of a BDC’s leveraged structure and its typical investment portfolio, however, uninformed investors may come to learn too late that their investment carries considerable risk.  Moreover, non-traded BDCs such as FSEP carry additional risks, including their lack of liquidity and high upfront fees and commissions.

Investors who wish to sell their FSEP shares through the Company’s Share Repurchase Program are limited as to timing, and may only do so quarterly pursuant to FSEP’s redemption program.  Further, the Company limits the amount of shares which it allows for repurchase each quarter.  For example, on July 2, 2018, FSEP “repurchased 4,554,498 common shares (representing 20% of common shares tendered for repurchase…) at $6.60 per share….”  Thus, a FSEP investor seeking to sell out of their entire for the quarter ending July 2, 2018, would have been limited to only selling 20% of their FSEP investment.

For investors seeking immediate liquidity on their non-traded FSEP shares, there does exist a limited and fragmented secondary market.  Unfortunately, however, recent pricing suggests that FSEP investors wishing to sell on a thinly traded secondary market may only do so at disadvantageous pricing of approximately $5.25 – $5.61 per share.  This recent secondary market pricing suggests that FSEP investors who recently sold their shares on the secondary market likely incurred substantial losses of approximately 45% on their initial investment, excluding distributions paid to date.

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 newcases@investorlawyers.net for a no-cost, confidential consultation.  Attorneys at the firm are admitted in New York, New Jersey and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).