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2024 BDC Roundtable by the Numbers
Trends in Capital Raising
Overview
Fireside Chat with Natasha Greiner
Pre-Conference Resources
Thank You to Our Sponsors!
Eversheds Sutherland/SBIA Teams
The Legislative Landscape
Fireside Chat with Bill Huizenga
Fireside Chat with Bailey DeVries
Views from the C-Suite
Views from the SEC Staff
AI, Cybersecurity and Data
The Latest in Compliance
Accounting & Valuation Trends
Structuring Alternatives for Private Credit
Eversheds Sutherland attorneys and representatives from leading investment banks discussed the current capital raising environment and their forecast of financial trends. As part of their discussion, they provided an overview of the current equity and debt markets and analyzed various avenues that BDCs and other funds can use to raise capital including IPOs, blind pool investments, bonds, notes, SBIC debt and subscription lines. Additionally, they reviewed some standard market terms and fees associated with various capital raising transactions. The conversation concluded with the panelists sharing their views on the factors BDCs should consider before conducting an IPO or engaging in other capital raising activities.
Alex Brown, Eversheds Sutherland Larry Herman, Raymond James Stephani Hildebrandt, Eversheds Sutherland JD Nelson, Oppenheimer & Co.
On September 17-18, 2024, Eversheds Sutherland and the Small Business Investor Alliance (“SBIA”) hosted the 21st annual BDC Roundtable in Washington, DC. This year, with nearly 350 representatives of issuers and their service providers in attendance, the Roundtable featured 13 panels that included senior management from the largest BDCs, investment banks, accounting firms and valuation consultants, as well as senior officials from the SEC, SBA and Congress.
Key takeaways from each session are highlighted below.
Overview
2024 BDC Roundtable by the Numbers
Trends in Capital Raising
Structuring Alternatives for Private Credit
What do you think are the most significant challenges facing the BDC industry this year?
A diverse panel of experts joined Eversheds Sutherland partners Owen Pinkerton and Kristin Burns to discuss important considerations when structuring private credit products. Mr. Pinkerton began the conversation by providing an overview of various product types, including private BDCs, non-traded BDCs, public BDCs, and closed-end funds. The panel then highlighted different aspects of each of these products including leverage capabilities, investment restrictions, and tax implications. The panel also reviewed how different products may fit together on a sponsor’s platform and certain issues that may arise with respect to data confidentiality and valuation. Ms. Burns then turned the discussion towards strategies to increase a fund’s or platform’s asset base. She provided an overview of BDCs of one, rated feeders, and other structures, and the panel discussed various operational and tax implications of each. The panel also engaged in a discussion regarding mergers between affiliated BDCs and acquisitions of closed-end funds by affiliated BDCs and the benefits of such mergers and acquisitions.
Speakers
Stephen Auriemma, PwC
Kristin Burns, Eversheds Sutherland
James Jefski, State Street
Samantha Owades, Morgan Stanley
Owen Pinkerton, Eversheds Sutherland
Inflation and interest rates Cybersecurity Geopolitical uncertainty Regulatory agenda Liquidity/maintaining asset coverage ratio Acquired Fund Fees and Expenses (“AFFE”) rule ESG considerations Co-Investment relief
71.43% 14.29% 19.05% 42.86% 33.33% 14.29% 14.29% 28.57%
Where do you see the most interest/growth potential for BDCs this year?
Listed BDCs
Non-traded BDCs
Private BDCs contemplating a listing/liquidity event
Private BDCs that remain perpetually private/BDCs-of-one
Multi-class, non-traded BDCs
Registered Closed-End Funds, including Interval Funds/ETFs
Internally-managed BDCs
19.05%
38.10%
38.10%
42.86%
19.05%
19.05%
14.29%
Fireside Chat with Bill Huizenga
In a fireside chat with Tonnie Wybensinger from the SBIA, Rep. Bill Huizenga (R-MI) provided insight into the legislative process and state of affairs during a transitional time in Washington. Highlighting his experience on the House Financial Services Committee and efforts to tie his work in Washington to his constituents in southwest Michigan, Rep. Huizenga encouraged attendees to build close relationships with the legislator offices with which they interface, with particular emphasis on highlighting the ways growth capital has benefitted their districts. Rep. Huizenga also discussed the role the House Financial Services Committee has played in overseeing the SEC, noting that lawmakers’ concerns about Chairman Gary Gensler’s regulatory agenda largely stemmed from the pace of rulemaking. In closing remarks, Rep. Huizenga encouraged attendees to find an “industry consensus” on issues relating to disclosure on acquired fund fees and expenses, noting that the current regulatory regime provided a “major impediment" to BDCs’ capital raising efforts, but that industry consensus would inure to the benefit of legislative consensus.
Speakers
Bill Huizenga (R-MI) Tonnie Wybensinger, SBIA
The Latest in Compliance: SEC Exams, CCO Liability and Other Hot Issues
Representatives of Eversheds Sutherland discussed recent trends in compliance for BDCs and lessons learned from their interactions with the SEC Staff over the last year. The group began by reviewing trends in the examination process, noting that recent exams of BDCs and other registrants have been more robust and broader in scope than in prior years. They noted that the SEC Staff has remained focused on several hot button issues during recent exams, including, among other things, custody practices, co-investment order compliance, valuation practices, and payment of brokerage fees to affiliated entities. The group discussed how registrants should be approaching exams in this new environment, emphasizing: (1) the importance of cooperating with the SEC Staff in their inquiries; (2) the continued necessity to develop compliance functions capable of self-identifying infractions; and (3) the need for BDC managers to maintain clear communication with their boards of directors regarding the current examination environment and the full spectrum of possible outcomes.
Speakers
Steve Boehm, Eversheds Sutherland Payam Siadatpour, Eversheds Sutherland John Walsh, Eversheds Sutherland
Accounting & Valuation Trends
A panel of accounting and valuation experts joined Eversheds Sutherland partners for a conversation on the latest industry developments. They first discussed recent enforcement cases brought by the SEC involving the policies and procedures of investment advisors with respect to GAAP requirements and calibration. Past statements from the Commission emphasized that the Staff is focused on the appropriateness of a portfolio’s policies and procedures. The panel then laid out standard approaches to calibration and important benchmarks.
The panel then discussed regulation S-X 6-11 requirements when seeding a new registered product from an existing private fund. The panel noted that the regulation was intentionally written broadly and recommend reaching out to SEC staff in advance to ensure matched expectations. When drafting seed financials, ensuring they are audited promptly and supplying up to date information at the start of the seeding process may help avoid delays in the SEC approval process.
The panel also discussed recent Accounting Standards Updates from the FASB that could impact BDC reporting, noting the new guidance does not specifically exempt BDCs from segment reporting. The American Institute of Certified Public Accountants Expert Panel has submitted a letter to the SEC highlighting that the guidance is primarily geared towards traditional operating companies, and most investment companies do not have more than one operating segment, but the SEC has not yet responded.
The panel then discussed PIK interest, as the topic has come up more frequently as credit quality in the market has slightly declined. The panel noted that PIK toggle options do usually affect the value of fund assets, as the market will usually discount such options from par.
The panel also explored the topic of differing valuations for the same assets in different public funds, acknowledging the subjective nature of valuations and the acceptability of multiple methods under PCAOB standards. The SEC will periodically comment if there are material deviations, which can pose issues for closed-end funds that may not have valuations more frequently than once per quarter.
Lastly, the panel touched on secondary market fund LP trades, where LPs typically sell at a discount to the NAV, suggesting potential overvaluation of NAV in primary markets and the practical expedient nature of secondary trading.
Speakers
Alex Bradford, RSM John Czapla, VRC Dwaune Dupree, Eversheds Sutherland Jaime Eichen, EY Neil Khettry, Citrin Cooperman Owen Pinkerton, Eversheds Sutherland
The Legislative Landscape
Speakers
Josh Bloomstein, Ares Management Cynthia Krus, Eversheds Sutherland Brian O'Shea, BPO Strategies Minh Ta, Carlyle Tonnie Wybensinger, SBIA
A panel of government affairs experts gathered in a breakout session to provide an outlook on BDC-related legislation. Tonnie Wybensinger of the SBIA highlighted the Small Business Investor Parity Act, which expands the section 199A pass-through deduction to include BDCs. Panelists also underscored the Access to Small Business Investor Capital Act, which is pending legislation that would allow funds that invest in BDCs to disclose acquired fund fees and expenses (AFFE) in a footnote rather than a line item in their fee table.
This change would increase the accuracy of the disclosures and improve the transparency of the market. Joshua Bloomstein of Ares and Brian O’Shea of BPO Strategies discussed proposals for legislation that would streamline the process for approval of co-investment exemptive relief
applications. In a nod to the importance of advocacy, Ms. Wybensinger encouraged the audience to prioritize highlighting the positive local impacts of BDC investments to legislators.
Fireside Chat with Bailey DeVries
Bailey DeVries, Associate Administrator and Head of the Office of Investment and Innovation at the US Small Business Administration, joined Brett Palmer, President of the Small Business Investor Alliance, for a fireside chat to discuss the role of the Small Business Investment Company program in the BDC industry. Ms. DeVries described the significant regulatory changes to the SBIC program adopted in the summer of 2023, highlighting the introduction of new types of SBIC licenses designed to expand the range of capital SBICs can provide small businesses. Ms. DeVries also noted the SBA’s interest in maintaining participation by the BDC industry in the SBIC program. For example, she explained that the SBA was evaluating whether current caps on the amount of leverageable private capital could be increased, making the program more feasible for larger BDC platforms. Ms. DeVries emphasized the role that BDCs play in capital formation and highlighted her office’s efforts to maintain transparency and dialogue in implementing regulatory changes to the SBIC program.
Speakers
Bailey DeVries, SBA Brett Palmer, SBIA
Fireside Chat with Natasha Greiner
Natasha Vij Greiner, Director of the SEC’s Division of Investment Management, joined Eversheds Sutherland’s Steve Boehm for a fireside chat. Ms. Greiner emphasized her desire to promote greater communication between the Staff and market participants as well as provide greater transparency in staff guidance. She also discussed a preference for easily accessible staff guidance like frequently asked questions reports, rather than no-action letters to individual participants.
Director Greiner noted that oversight of fees and expenses and proper valuation practices are critical topics to the Division and encouraged the audience to continue to communicate with the Staff on these issues. As Ms. Greiner looked towards the future, she mentioned the Staff’s focus on the future of technology, including AI, and the growth of private credit, and reiterated the importance of greater engagement between the Staff and industry experts to navigate the impacts of those factors.
Speakers
Natasha Greiner, SEC Steve Boehm, Eversheds Sutherland
Views from the SEC Staff
Eversheds Sutherland partners were joined by members of the SEC Staff to discuss current areas of focus relevant to BDCs, including compliance, valuation, and disclosure. The panelists highlighted that the complexity and size of the BDC industry is increasing and the attention on private credit is growing rapidly, meaning the Staff’s focus on BDCs and private credit is also increasing.
David Marcinkus of the SEC discussed valuation and Rule 2a-5, noting that Rule 2a-5 put in place minimum standards for boards of directors in terms of overseeing a BDC’s valuation process and that directors should focus on having a solid understanding of that process. Mr. Marcinkus also explained that Rule 2a-5’s adopting release includes guidance for directors.
Next, Terri Jordan of the SEC discussed the exemptive relief process and co-investment exemptive relief, noting that BDCs should consider whether an application for relief is ripe at the time of filing. Ms. Jordan emphasized the Staff’s willingness to discuss applications with registrants that have ripeness concerns. Ms. Jordan also reemphasized that as BDC platforms are becoming increasingly complex, their co-investment applications are also increasingly complex, and reviewing these applications takes additional time. Ms. Jordan also highlighted that the Staff is focused on fees earned in connection with co-investment transactions.
Jay Williamson of the SEC discussed BDC disclosure, noting that BDCs should focus on having more effective disclosure, specifically as it relates to deal flow, new asset classes and payment-in-kind (“PIK”) loans. Mr. Williamson and Payam Siadatpour of Eversheds Sutherland discussed the balance of having effective disclosure that reflects business practices while maintaining flexibility.
The panelists concluded by noting that it is beneficial for BDCs to engage with the Staff about current challenges facing the industry, so that they can learn more about these issues.
Speakers
Terri Jordan, SEC David Marcinkus, SEC Jay Williamson, SEC Anne Oberndorf, Eversheds Sutherland Payam Siadatpour, Eversheds Sutherland
AI, Cybersecurity and Data
The AI, Cyber and Data session began with an introduction to the rapid growth of data and its foundational role in AI within private markets. Cesar Estrada of Arcesium highlighted the need for modern data structures to support AI and Rachel Reid of Eversheds Sutherland explained the unique risks of generative AI, such as hallucinations and bias. Neal Higgins of Eversheds Sutherland discussed AI’s growing role in private credit, emphasizing its impact on risk management and real-time analysis. Eversheds Sutherland partners Dwaune Dupree and Eric Simanek discussed the SEC’s proposed rules on predictive data analytics and conflicts of interest, noting the importance of due diligence and transparency when investment advisers and firms use AI to interact with investors. Mr. Dupree and Mr. Simanek stressed that firms must conduct due diligence before engaging third-party providers. The session concluded with the panelists emphasizing the importance of robust cybersecurity measures as AI tools increasingly handle sensitive financial data. The panelists expect that strong risk management practices will continue to be essential for individuals and firms within the private credit space.
Speakers
Dwaune Dupree, Eversheds Sutherland Cesar Estrada, Arcesium Neal Higgins, Eversheds Sutherland Rachel Reid, Eversheds Sutherland Eric Simanek, Eversheds Sutherland
Views from the C-Suite
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 because of the strength of the private credit market. Each panelist highlighted the fact that BDCs are experiencing strong credit performance overall and continue to see many opportunities to invest in high-quality portfolio companies. They discussed how disciplined lending is a driver of success in the BDC market and noted that there is room for BDCs to expand into other sectors of the credit market. They also highlighted that it is possible to develop a consistent pace of origination in the non-traded BDC space when there is origination scale across platforms. Panelists predicted that the perpetual offering structure of a non-traded BDC will gain more prominence in the BDC space in the future and discussed the many opportunities and risks for disruption AI poses in the private credit space. Each of these industry leaders emphasized that the BDC industry will continue to grow and that its long-term outlook is positive.
Speakers
Jonathan Bock, Blackstone Alex Chi, Goldman Sachs Ken Kencel, Churchill Asset Management Cynthia Krus, Eversheds Sutherland Craig Packer, Blue Owl Kort Schnabel, Ares
Pre-Conference Workshop resources
Co-Investment Transactions and Exemptive Relief presentation
SBIC Workshop presentation
AI, Cybersecurity and Data presentation
AI, Cybersecurity and Data video
Thank you to our sponsors!
The Eversheds Sutherland BDC Team
The SBIA Team
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
stephanihildebrandt
@eversheds-sutherland.com
+1 202 383 0845
Sara Sabour Nasseri
Partner
saranasseri
@eversheds-sutherland.com
+1 202 383 0806
Eric Simanek
Partner
ericsimanek
@eversheds-sutherland.com
+1 202 220 8412
Brett Palmer
President
Tonnie Wybensinger
Head of Government Relations
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To learn more about the Roundtable, or request an invitation to the 2025 event, please email bdc@eversheds-sutherland.us
Owen J. Pinkerton
Partner
owenpinkerton
@eversheds-sutherland.com
+1 202 383 0262
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