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On April 11 – 12, 2023, Eversheds Sutherland and the Small Business Investor Alliance (“SBIA”) hosted the 20th annual BDC Roundtable in Washington, DC. Widely acknowledged as the premier gathering for the BDC industry, over the past 20 years the Roundtable has hosted over 3,500 attendees, 450 speakers, and 200 panels. This year, with nearly 300 representatives of issuers and their service providers in attendance, the Roundtable featured 16 panels that included senior management from the largest BDCs, investment banks, accounting firms and valuation consultants, as well as a number of senior officials from the SEC. Key takeaways from each session are highlighted below.
2023 BDC Roundtable by the Numbers
Eversheds Sutherland partners participated in a pre-conference session to discuss the characteristics of non-traded BDCs, their place in the broader BDC ecosystem, and the applicable regulatory requirements. Non-traded BDCs publicly offer their shares but do not list them on an exchange. This product was first modeled after non-traded REITs, but it has changed greatly over time. In 2020, the SEC began granting non-traded BDCs exemptive relief to allow them to offer multiple share classes with varying sales loads. The ability to offer multiple share classes, which, as of the date of the BDC Roundtable, is not available to private BDCs, generally gives non-traded BDCs greater access to retail investors. Recently non-traded BDCs have seen success on large wealth management platforms, partially as a result of this exemptive relief. One of the key characteristics of non-traded BDCs is that they must comply with state “blue sky” laws and register their shares in states where their shares are offered and, as a result, face additional costs as private and listed BDCs are not required to make blue sky filings.
The Latest in Non-Traded BDCs
Speakers
Cynthia Krus, Partner, Eversheds Sutherland (moderator)
Kristin Burns, Partner, Eversheds Sutherland
Dwaune Dupree, Partner, Eversheds Sutherland
Owen Pinkerton, Partner, Eversheds Sutherland
Where do you see the most interest/growth potential for BDCs this year?
BDC industry veterans joined our “Ask Me Anything” session to discuss the past, present and future outlook of the BDC industry. The panel explored recent trends, including a greater interest in private, non-traded and externally managed BDCs. Private and non-traded BDCs continue to appeal to investors who desire exposure to assets not readily available to the public. The ability to invest in externally managed BDCs that are part of a larger credit management platform remains a draw for investors.
The panelists agreed that there is no sign of the SEC easing the pace of its rulemaking, and added it is uncertain when the SEC will revisit the AFFE rule. Looking towards the future, the panelists concurred that there will be a need for the asset class and returns provided by BDCs, even in a possible recession. Despite the uncertain economic outlook, one panelist predicted that in the next five years the BDC industry will double in assets under management.
#BDCAMA (Ask Me Anything)
What do you think are the most significant challenges facing the BDC industry this year?
Speakers
Cynthia Krus, Partner, Eversheds Sutherland (moderator)
Matt Giordano, Partner, KPMG
Al Laufenberg, Managing Director, KBW/Stifel
Cindy Ma, Managing Director, Global Head of Portfolio Valuation
and Fund Advisory Services, Houlihan Lokey
Stephani Hildebrandt, Partner, Eversheds Sutherland
A panel of accounting and valuation professionals led a discussion on how inflation, rising interest rates and bank failures have impacted BDCs and their portfolio companies. The impact can be seen in financial statements and in downward pressure on portfolio company valuations. While there has been an uptick in portfolio company defaults, the frequency of defaults has not risen to the level experienced during the peak of the COVID-19 pandemic.
The panelists also discussed how the industry has implemented controls for compliance with the requirements of Rule 2a-5. While some BDCs have designated valuation functions to a valuation designee, others have retained the valuation responsibilities with the board of directors. For those that have designated their valuation functions, it is important to assess the separation of the deal and portfolio management teams from the designated valuation functions, the information reviewed by the board of directors to satisfy their oversight responsibilities, valuation testing methodologies used and the frequency of testing, and the role of third-party pricing service providers in the valuation process.
On the accounting side, issuers should be aware that the SEC Staff recently provided new guidance on the concept of materiality and the correction of material errors. When an error is identified, it is important for issuers, auditors and audit committees to assess the materiality of the error by applying an objective approach from a reasonable investor’s perspective based on the total mix of information, including both quantitative and qualitative factors.
Breakout Session: Accounting and Valuation
In response to the SEC’s Rule 2a-5 regarding valuation, has the BDC with which you’re affiliated:
Speakers
Dwaune Dupree, Partner, Eversheds Sutherland (moderator)
Clay Chandler, Partner, Deloitte
John Czapla, Senior Partner and Chairman of the Board, VRC
Jaime Eichen, Partner, EY
Patricia Luscombe, Managing Director, Lincoln International
Payam Siadatpour, Partner, Eversheds Sutherland (moderator)
This breakout session was devoted to discussing a variety of compliance and co-investment topics.
In the co-investment space, Eversheds Sutherland partner Anne Oberndorf, who has worked on dozens of SEC exemptive applications in that area, highlighted recent trends of note. The 1940 Act prohibits “joint transactions” between BDCs and certain affiliates, and therefore BDCs seeking to co-invest in issuers with other funds on their platform typically file an application with the SEC to obtain an exemptive order to permit such co-investments. The “new model” of co-investment application is now being widely used as it includes relief for enhanced review follow-ons. Beginning in mid-2022, Eversheds Sutherland saw an increase in application filings due to applicants requesting that the SEC amend prior orders to account for the new expanded definition of “Follow-On Investments.” In addition, several applications included a footnote that discusses how private funds that are collateralized loan obligation funds (“CLOs”) are treated under the exemptive order.
Turning to the SEC examination program, the scope of SEC examinations appears to have broadened with lengthy request lists, in depth interviews and close questioning. Recent SEC examinations have remained focused on reviewing books and records, including emails, but in some cases have turned to employees’ personal devices potentially holding “off channel” text messages. The panelists anticipate that the SEC Staff will quickly expand their examination focus to include newly enacted rules from the SEC’s robust rulemaking agenda.
Breakout Session: Compliance, Exams and Co-Investment
If the SEC were to consider additional incremental
co-investment relief, would you be most interested in:
Speakers
Steve Boehm, Partner, Eversheds Sutherland (moderator)
Anne Oberndorf, Partner, Eversheds Sutherland
John Walsh, Partner, Eversheds Sutherland
Jon Waterman, Partner, Financial Services, RSM
The growing focus on diversity and environmental, social and governance (“ESG”) topics was the main subject of conversation at this breakout session, particularly as regulators and shareholders have demonstrated heightened interest in these areas. Nasdaq and certain states have pushed for increased disclosure around board diversity, and proxy advisory firms Glass Lewis and Institutional Shareholder Services have recommended shareholders vote “no” in director elections where the registrant’s board has failed to meet certain diversity metrics. Shareholders and proxy advisory firms have also trained their attention to certain governance trends, resulting in new pushes to declassify boards, prevent directors from serving on too many boards, and scrutinize increases to director compensation. Finally, BDCs are increasingly considering ESG topics at both a company level and individual investment level, but have faced a growing “anti-ESG” movement spearheaded by certain state attorneys general. BDCs implementing ESG components in their investment processes should consider the increased scrutiny these topics have drawn from all sides, including large institutional investors’ push for further company disclosure regarding ESG-related risks and opportunities.
Breakout Session: ESG and Diversity
How has the BDC with which you are affiliated adapted in response to new ESG considerations, including related board diversity considerations?
Speakers
Cindy Beyea, Partner, Eversheds Sutherland (moderator)
Don Cassidy, Senior Managing Director, Georgeson
Stephani Hildebrandt, Partner, Eversheds Sutherland (moderator)
Tom Raterman, Chief Financial Officer, Chief Operating Officer, Runway Growth Capital
In a fireside chat with Eversheds Sutherland’s Steve Boehm, Kaitlin Bottock of the SEC’s Division of Investment Management gave an overview of the Division’s function, structure and authority. She highlighted the Division’s role in providing industry expertise to SEC Staff across all divisions, supporting the Commission’s regulatory and examination function, and ensuring that market participants receive consistent feedback from SEC Staff on industry-specific issues. Ms. Bottock noted that the Division encourages market participants to seek guidance from SEC Staff on both new and well-established issues to ensure that current industry-specific precedent continues to grow thereby facilitating industry expansion and ensuring investor protection. Ms. Bottock also discussed the process of reviewing co-investment applications and the Division’s role in issuing no-action letters, noting that in light of the Division’s case load participants are encouraged to seek the Division’s guidance in a timely manner, especially on more complex or novel issues.
Fireside Chat with Kaitlin Bottock
Speakers
Steve Boehm, Partner, Eversheds Sutherland (moderator)
Kaitlin Bottock, Co-Chief Counsel, Division of Investment Management, SEC
The 118th Congress will have several key issues to address in the coming months, as explained by Brett Palmer, President of the Small Business Investor Alliance. One item on the agenda is raising the debt ceiling, which is the legislative limit on how much the United States can borrow. According to Mr. Palmer, the GOP is pushing to add a ten year balanced budget timeline to any debt ceiling negotiation. Congress also faces pressure to address high inflation, which many see as a more pervasive problem than unemployment in the current economic environment. Mr. Palmer also highlighted the Access to Small Business Investor Capital Act, a bill that would allow funds that invest in BDCs to disclose their acquired fund fees and expenses (“AFFE”) in a footnote, rather than as a line item, in their fee table. The SBIA and many industry participants view the AFFE issue as a priority, and Mr. Palmer expressed optimism that with 11 co-sponsors in the House, there is an opportunity for further progress on educating members of Congress on the benefits of the proposed legislation.
Washington Update: The New Congress and Its Impact on BDCs
Speaker
Brett Palmer, President, Small Business Investor Alliance
A panel of Hill experts joined us on stage to discuss lessons learned and best practices for interacting with policymakers and legislators. Notably, panelists discussed the importance of storytelling when interacting with government officials. Panelists recommended that when discussing BDC-related issues with members of Congress, examples of how the BDC is investing in their district should be shared if applicable. Panelists also underscored to the audience that all politics are local.
Other tips include keeping conversations concise and memorable (officials have busy schedules), remaining cordial (even if you disagree on the issues), and building a solid relationship before approaching an official with requests.
In light of the recent bank failures, the panelists reminded the audience that BDCs will be part of the solution to any economic challenges ahead. The vital role BDCs play in capital formation should be central to the story the industry recounts to Congress.
The Legislative Landscape
Speakers
Steve Boehm, Partner, Eversheds Sutherland (moderator)
Joshua Bloomstein, Partner and General Counsel (Credit) and Deputy General Counsel (Corporate), Ares
Jason Cole, Head of Public Policy and Corporate Affairs, FS Investments
Minh Ta, Principal, Global Government Affairs, The Carlyle Group
Tonnie Wybensinger, Executive Director, Small Business Investor Alliance
Eversheds Sutherland partners were joined by members of the SEC Staff to address current SEC rulemaking themes and compliance initiatives.
Panelists highlighted the advancement of technology (including cybersecurity concerns), a change in investor demographics, and increased competition in the asset management industry as major factors contributing to the recent influx of rulemaking and noted that data trend analysis will inform rulemaking in the future. Ms. Jordan emphasized that the Staff welcomes and considers all comments on proposed rulemakings and encouraged market participants to submit such comments.
Next, panelists discussed the exemptive relief process, noting that submitting complete and thorough applications is essential for an efficient process.
Mr. Flantsbaum then discussed examinations, noting that currently examinations may be hybrid, on-site or remote. He encouraged market participants to not be intimidated by examinations, and to maintain an open dialogue with the Staff throughout the process. Ultimately, the SEC and market participants share common goals of investor protection and capital formation.
Ms. Jordan and Mr. Flantsbaum concluded by explaining that the SEC hopes to have an open dialogue with BDCs to better understand the perspective of BDCs and to develop knowledge within the BDC space.
SEC Speaks: Regulatory & Compliance
Speakers
Kristin Burns, Partner, Eversheds Sutherland (moderator)
Steve Flantsbaum, Senior Special Counsel Fellow, SEC
Terri Jordan, Branch Chief, Division of Investment Management, SEC
Cynthia Krus, Partner, Eversheds Sutherland (moderator)
Eversheds Sutherland partners were joined by a second panel of the SEC Staff for a conversation regarding current topics in accounting and disclosure. The panel discussed certain proposed rules, including rules related to custody, cybersecurity, and privately offered securities. In addition to proposed rules, the panelists spent some time discussing recently adopted rules, noting that one of the SEC Staff’s 2023 enforcement priorities is focusing on newly adopted rules. The panelists discussed Rule 2a-5, a recently adopted valuation rule, and provided insight into what constitutes appropriate board oversight of a valuation designee. Throughout the panel, the panelists stressed various disclosure points, including risk disclosures. The panelists noted that registrants should be diligent in ensuring that their risk disclosures remain accurate, and if needed, registrants should provide updated risk disclosures throughout the year. The main takeaway from the panel, which should come as no surprise to any SEC registrant, is that registrants should work to ensure that their disclosures reflect their actual business practices, and that their actual business practices are reflected in their disclosures – in other words, do as you say and say as you do.
SEC Speaks: Accounting & Disclosure
Speakers
Kristin Burns, Partner, Eversheds Sutherland (moderator)
Alex Bradford, Assistant Chief Accountant, Division of Investment Management, SEC
Catalina Jaime, Branch Chief, Division of Investment Management, SEC
Jay Williamson, Branch Chief, Division of Investment Management, SEC
Cynthia Krus, Partner, Eversheds Sutherland (moderator)
A group of leading industry participants held a lively conversation on capital raising in the current environment. They agreed that activity among BDCs in the last year was generally slower than in prior years, largely in response to rising interest rates. While there has been some activity in the capital markets, a large portion of new capital has come from “at-the-market” offerings and through SBIC debentures. In particular, SBIC debentures have been an ideal way to raise investment capital in a rising interest rate environment because of their competitive rates. In discussing the use of SBIC debentures, Damien Dwin of Lafayette Square said that “this is a moment to run towards institutions and the transparency that comes with them,” arguing that the SBIC program is filling a gap in capital formation that allows direct lenders to reach traditionally underserved borrowers. Slow activity in the capital markets has also stalled many IPOs, but the panelists all agreed that BDCs considering a public listing should use this time to make sure that the necessary infrastructure is in place in order to be ready to take advantage of opportunities as they arise.
Capital Raising in the Current Environment
Speakers
Payam Siadatpour, Partner, Eversheds Sutherland (moderator)
Dwaune Dupree, Partner, Eversheds Sutherland (moderator)
Cliff Booth, Managing Director, Head of Specialty Finance, Oppenheimer & Co.
Damien Dwin, Founder and Chief Executive Officer, Lafayette Square
Larry Herman, Managing Director, Raymond James
John Kline, President & CEO, NMFC, New Mountain
Prominent BDC CEOs closed out the Roundtable by sharing their views on the industry’s current trends and outlook. These industry leaders overwhelmingly agreed that BDCs are well positioned to face any economic challenges that may occur in the near-term, including the risk of recession. Each panelist highlighted the fact that BDCs are experiencing strong credit performance overall and are seeing increased opportunities to invest in high-quality portfolio companies. Craig Packer of Blue Owl noted that each type of BDC – private, non-traded and public – is seeing a growth in demand from investors that will likely continue. Kipp deVeer of Ares Capital Corporation indicated that consistent management approaches have driven this success. Ken Kencel of Churchill Asset Management echoed these thoughts and underscored the importance of developing a strong investment philosophy and adhering to that philosophy to deliver to investors over a long period. Bowen Diehl of Capital Southwest highlighted that continuing to learn and improve is also important when managing a BDC. Each of these industry leaders emphasized that the BDC industry will continue to grow and that its long-term outlook is positive.
The C-Suite Perspective
Speakers
Cynthia Krus, Partner, Eversheds Sutherland (moderator)
Kipp deVeer, Chief Executive Officer, Ares Capital Corporation
Bowen Diehl, President and Chief Executive Officer, Capital Southwest
Ken Kencel, President and Chief Executive Officer, Churchill Asset Management
Craig Packer, Co-Founder and Senior Managing Director, Blue Owl
Pre-Conference resources
Thank you to our sponsors!
The Eversheds Sutherland BDC Team
The SBIA Team
The ABCs of BDCs
Key Considerations for BDCs that Use Derivatives
In Brief: What to Consider Before Launching an Interval Fund
In Brief: An Introduction to Auction Funds
Steven B. Boehm
Partner
stevenboehm
@eversheds-sutherland.com
+1 202 383 0176
Cynthia R. Beyea
Partner
cynthiabeyea
@eversheds-sutherland.com
+1 202 383 0472
Dwaune L. Dupree
Partner
dwaunedupree
@eversheds-sutherland.com +1 202 383 0206
Anne G. Oberndorf
Partner
anneoberndorf
@eversheds-sutherland.com
+1 202 383 0966
Payam Siadatpour
Partner
payamsiadatpour
@eversheds-sutherland.com
+1 202 383 0278
Cynthia Krus
Partner
cynthiakrus
@eversheds-sutherland.com
+1 202 383 0218
Kristin Hespos Burns
Partner
kristinburns
@eversheds-sutherland.com
+1 212 287 7023
Stephani M. Hildebrandt
Partner
stepnanihildebrandt
@eversheds-sutherland.com
+1 202 383 0845
Owen J. Pinkerton
Partner
owenpinkerton
@eversheds-sutherland.com
+1 202 383 0262
Eric Simanek
Partner
ericsimanek
@eversheds-sutherland.com
+1 202 220 8412
Brett Palmer
President
Tonnie Wybensinger
Head of Government Relations
HOME
Overview
2023 BDC Roundtable
by the Numbers
Overview
The Latest in
Non-Traded BDCs
Breakout Session: Accounting and Valuation
Breakout Session: Compliance, Exams and Co-Investment
#BDCAMA (Ask Me Anything)
Breakout Session: ESG and Diversity
Washington Update: The New Congress and Its Impact on BDCs
Fireside Chat with
Kaitlin Bottock
SEC Speaks: Regulatory & Compliance
The Legislative Landscape
SEC Speaks: Accounting & Disclosure
Capital Raising in the Current Environment
The C-Suite Perspective
Pre-Conference Resources
Thank You to Our Sponsors!
BDC/SBIA Teams
Brett Palmer's
"Politics and Policy'
presentation slides
To learn more about the Roundtable, or request an invitation to the 2024 event, please email bdc@eversheds-sutherland.us
