Nontraded BDC redemption requests ease to 9.8% in third quarter, Fitch says

Redemption requests at nontraded business development companies eased in the third quarter but stayed far above the pace the category saw in its earlier years. Requests averaged 9.8% of shares across 13 of the 15 perpetual funds Fitch Ratings tracks, down from 10.3% in the second quarter, InvestmentNews reported.

That is more than three times the 3% quarterly average Mark Goldberg, founder of Alternative Investments Market Intelligence and a former broker-dealer chief, cites for redemptions at funds that have been running close to five years.

InvestmentNews also reported that new sales into the category have dropped this year, alongside redemption pressure at managers including Blue Owl.

Nontraded BDCs do not trade on an exchange, so selling shares back to the manager is nearly the only way a client gets cash, and the funds cap repurchases at 5% of shares per quarter. Fitch reported requests below that cap at six BDCs and above it at nine.

Blue Owl Technology Income Corp. drew redemption requests equal to 39% of its shares, according to the Fitch report as described by InvestmentNews.

For advisors, the 5% quarterly repurchase cap is the number that governs when a client gets paid. InvestmentNews describes manager fees and advisor commissions on products sold with yields above 9% to 11%; those products now carry a quarterly exit cap. A request equal to 39% of shares against a 5% cap implies a multi-quarter wait under steady repurchase activity.

Goldberg does not read the third quarter as the turn. “There’s more demand by investors every quarter to redeem these shares that has nothing to do with the backlog demand, or those clients already waiting in line to sell,” he told InvestmentNews. That demand “may be cresting, as Fitch and others have noted, but it will take many quarters for the problem to be resolved,” he added.

Fitch said repurchase activity began to ease in the quarter, and it flagged that levels varied across the sector. Until requests sit nearer the 3% Goldberg calls normal, or the funds change the 5% cap, advisors have to re-underwrite redemption risk for each client.