November 17, 2013

Forbes Article Misrepresents BDC Fees, Performance: Franklin Square

Controversy over business development companies amps up thanks to recent magazine profile

The title of a recent Forbes article tells you all you need to know about how it feels about nontraded business development companies — “The  Overly Expensive, Tricky To Sell Investment Product Everyone Seems To Be Buying.”

Yet it raises the question, if they’re expensive and “tricky” to sell, yet still popular, are investors dimwitted or are purveyors of the product dishonest?

Neither, said Michael Forman, CEO of Philadelphia's Franklin Square Capital Partners, the subject of the Forbes article. He believes the venerable publication made a simple mistake — an apples-to-oranges comparison.

“The focus of the article focused on two things: performance and fees,” Forman explained to ThinkAdvisor in a rebuttal of the article. “I appreciate that this would be the focus and it should, but it’s far more nuanced than the manner in which it was presented.”

Zachary Klehr, the firm’s executive vice president, addressed the Forbes description of its returns as “subpar,” noting what he feels is the misleading comparison with publicly traded BDCs. He added that the Franklin Square product has the second best return in its competitive set, with between 16% and 17% annualized returns since inception.

“The article focused on year-to-date returns,” Klehr argued. “The only way we can really compare nontraded with publicly traded BDCs is through the [net asset value] performance.  For nontraded BDCs, that means the change in the net asset value plus all distributions made to investors.”

The FS Investment Corp. Fund’s total return was 33.33% in 2009, 13.08% in 2010, 8.93% in 2011, 15.83% in 2012 and 7.52% so far in 2013. Total return since its Jan. 1, 2009 inception is 16.26%.

By comparison, the S&P 500 returned 26.46% in 2009, 15.06% in 2010, 2.11% in 2011, 16% in 2012 and 28.46% so far in 2013.

“We are very up-front with our investors and tell them what to expect,” Klehr continued. “This is a noncorrelated alternative investment meant to compliment the portfolio. Publically traded BDCs, on the other hand, are very correlated.”

As to the fees associated with the product, “it could either be a 10% up-front load or it could be nothing. If you invest through an RIA or a wrap account it might cost you a smaller amount each year, but that 10% figure cannot be taken in a vacuum.”

Noting the product is typically held for between five and seven years, Klehr figured a typical 1.5% fee charged by an advisor will end up costing more than the front-end load over the life of the investment.

“There is a premium in the market for publicly traded BDCs,” he concluded. “Our competitors are trading currently at about a 14% premium. We offer strong, stable returns at that 10% level, so you can see we are extremely competitive for the appropriate investor.”

Correction: In Zachary Klehr's quote, "share price" was changed to "net asset value."

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