institute for portfolio alternatives practice … · presentation of total returns of non-listed...

Issued by the Institute for Portfolio Alternatives April 27, 2015.

INSTITUTE FOR PORTFOLIO ALTERNATIVES PRACTICE GUIDELINE 2015-01

NON-LISTED BDC PRACTICE GUIDELINE

IPA.COM |

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Effective Date The provisions of this Practice Guideline become effective on April 27, 2015.

Affected REITs This Practice Guideline is applicable to all publicly registered, non-listed BDCs.

Practice Guideline Overview The This IPA Practice Guideline provides recommendations in the following areas relating to published performance figures of non-listed BDC securities and the disclosure of such performance figures. The following paragraphs provide the suggested guidelines with respect to each of these areas:

1. Basis of performance figures

2. Reporting of performance figures

3. Shareholder Returns (Without Sales Charge) definition, example of methodology and recommended disclosure

4. Shareholder Returns (With Sales Charge) definition, example of methodology and recommended disclosure

5. Net Asset Value (“NAV”) Returns definition, example of methodology and recommended disclosure

1. Basis of Performance FiguresGuideline: The IPA recommends that three performance figures be approved for use in reference to the presentation of total returns of non-listed BDC securities: Shareholder Returns (Without Sales Charge), Shareholder Returns (With Sales Charge) and NAV Returns calculated in accordance with generally accepted accounting principles (“GAAP”).

Discussion: The IPA believes performance figures are a critical tool for current and prospective investors, financial advisors, due diligence officers, investment analysts and others when evaluating investment opportunities. The IPA also believes that published performance figures presented in marketing materials, including company websites, should be standardized for all IPA members and that a uniform and consistent methodology be applied when calculating and presenting returns. The unique, somewhat hybrid structure of a non-listed BDC, however, has made the calculation of traditional performance figures challenging. For example, unlike traditional closed-end funds, the common stock of non-listed BDCs is not listed on a





national securities exchange. As a result, no reliable market price for non-listed BDCs can be derived from active exchange markets. Non-listed BDCs are also generally differentiated from other direct participation programs (“DPPs”) and non-listed REITs in that a NAV is calculated daily, weekly or monthly and is required to be publicly disclosed quarterly in financial statements filed with the U.S. Securities and Exchange Commission (“SEC”). Further, the offering share prices of non-listed BDCs are determined as a function of the applicable BDC’s NAV, but do not necessarily move precisely in-line with NAV. These nuances require the calculation of performance figures for non-listed BDCs to differ from both closed-end funds, exchange traded securities, open-end mutual funds and non-listed REITs.

The IPA recommends that three performance figures, Shareholder Returns (Without Sales Charge), Shareholder Returns (With Sales Charge) and NAV Returns be used to provide non-listed BDC investors and other constituents with accurate, representative and transparent investment return information. The applicability of each of these performance figures given certain situations is discussed below.

Shareholder Returns (Without Sales Charge) is a total return calculation that captures the difference in price (as influenced by changes in NAV) between a non-listed BDC’s share price at the beginning of t he applicable period and the BDC’s redemption price at the end of the period, adjusted for any distributions paid during the relevant timeframe. The opening price for this performance figure is the applicable non-listed BDC’s public offering price excluding deductions for any selling commissions and dealer manager fees, if any. The exit price for this performance figure is the price at which the applicable non-listed BDC offers to purchase shares pursuant to its share repurchase program. Any distributions paid during the period are factored into the calculation. The calculation also assumes full participation in the non-listed BDC’s distribution reinvestment program (“DRP”). The assumption of full DRP participation is consistent with industry practice for mutual funds and listed closed-end funds. This performance figure gives investors and other interested parties the ability to analyze non-listed BDC returns distinct from any distribution fees that may be paid, which can vary by BDC, BDC investors, or BDC share class. For example, shareholders purchasing shares for advisory accounts will pay different selling commissions and dealer manager fees than shareholders purchasing shares through brokerage accounts. Shares can also be purchased at different breakpoints depending on the size of a shareholder’s investment. Presenting returns excluding any selling commissions and dealer manager fees allows these different shareholder groups to compare performance of non-listed BDCs independent from costs of distribution. This performance figure is net of any management, incentive, interest charges and general and administrative expenses a non-listed BDC may incur (fees and expenses that apply



to all investors regardless of whether they purchased shares without a load). Shareholder Returns (Without Sales Charge) can be calculated using publicly available information and performance can be published monthly.

Shareholder Returns (With Sales Charge) is a total return calculation that captures, similar to Shareholder Returns (Without Sales Charge), the difference between a non-listed BDC’s share price at the beginning of the applicable period and the BDC’s redemption price at the end of the period, adjusted for any distributions paid during the relevant timeframe. The calculation assumes full participation by the investor in the BDC’s DRP. The difference between Shareholder Returns (Without Sales Charge) and Shareholder Returns (With Sales Charge) is that the opening price for this performance figure is the applicable non-listed BDC’s public offering price, which is the price per share of a non-listed BDC’s common stock including the maximum selling commission and dealer manager fee disclosed by prospectus (and therefore not assuming any waiver or reduction of those fees). This performance figure gives investors and other interested parties the ability to compare non-listed BDC performance inclusive of any selling commissions and dealer manager fees that may be included in the maximum offering price. Shareholder Returns (With Sales Charge) is also net of any management, incentive, interest charges and general and administrative expenses a non-listed BDC may incur. Similar to Shareholder Returns (Without Sales Charge), Shareholder Returns (With Sales Charge) can be calculated using publicly available information and performance can be published monthly.

An NAV Return is a total return calculation that measures changes in a non-listed BDC’s NAV per share adjusting for any distributions paid during the applicable period. Similar to the Shareholder Returns (Without Sales Charge) and Shareholder Returns (With Sales Charge), NAV Returns are net of any management, incentive, interest charges and general and administrative expenses a non-listed BDC may incur. Although NAV returns do not represent an actual return to shareholders, the performance figure does provide investors, due diligence officers and other non- listed BDC constituents with uniform and transparent return information on a non-listed BDC’s investment portfolio in conformance with GAAP. NAV Returns also give interested parties the ability to compare performance of non-listed BDCs to that of listed BDCs, mutual funds and closed-end funds that also use GAAP returns based on non-exchange observed values. The IPA believes the ability to make these types of performance comparisons is highly valuable to existing and potential investors. The calculation and use of NAV Returns when disclosing performance figures is consistent with industry practice for other investment companies regulated under the Investment Company Act of 1940, as amended. The one limitation of NAV Returns is that the performance figure can only be published quarterly, with a notable delay between the applicable



period end and publication due to SEC Form 10-K and 10-Q filing requirements. Because NAV Returns can only be generated for investors on a quarterly basis, the IPA recommends NAV Returns be used to complement, rather than replace, the other performance figures described herein.

2. Reporting of performance figuresGuideline: The IPA recommends that its members provide performance figures as illustrated below.

Presentation 1

Presentation 2

Presentation 1 Discussion: The IPA recommends that Shareholder Returns (Without Sales Charge) for non- listed BDCs be presented for the year-to-date period, rolling 1-year, 3-year and 5-year periods and since inception. The year-to-date and 1-year returns should be compounded monthly (not annualized). The 3- year, 5-year and annualized since inception returns should be the average annual total return for the relevant period, compounded monthly. A cumulative total return since inception, compounded monthly, should also be given. These return metrics are consistent with the calculation and performance figure tables published by other investment companies, such as mutual funds and closed-end funds. The IPA does not believe a performance figure for 10-year returns is necessary given that many, if not all, non-listed BDCs will have completed a liquidity event prior to the offering’s 10-year anniversary. Presenting returns excluding any selling commissions and dealer manager fees allows investors and other interested parties the ability to analyze non-



listed BDC returns distinct from any distribution fees that may be paid, which can vary by BDC, BDC investors, or BDC share class.

The IPA recommends that Shareholder Returns (With Sales Charge) for non-listed BDCs be presented as a cumulative return since inception. Similar to Shareholder Returns (Without Sales Charge), this performance figure is based on information that is generally available to the public and can be calculated and updated on demand. The IPA believes that the cumulative return since inception is the only applicable period for which Shareholder Returns (With Sales Charge) should be shown because it believes the costs of distribution are a function of the expected holding period for an investment. The IPA believes that individuals, financial advisors and others considering the investment merits of a non-listed BDC do so in the context of an expected holding period of five or more years and thus factor in the costs of distribution in making their investment decision. This expected holding period is more than an investment objective; the structure of non-listed BDCs generally limits the ability of shareholders to redeem their shares prior to a liquidity event, which generally takes place two to three years after the closing of an offering and five to seven years after an offering commences operations. The expected holding period of non-listed BDCs is also materially longer than many other investment offerings. For example, as shown in DALBAR’s 2014 Quantitative Analysis of Investor Behavior, the average holding period of a fixed income mutual fund in 2013 was less than three years. Mutual funds that show the costs of distribution for intermittent periods do so in the context of an investor base with a relatively short investment horizon. For these reasons, the relative annual performance of non-listed BDCs when including any costs of distribution is not comparable to the annual performance of other investment offerings when including their costs of distribution. The IPA believes that non-listed BDCs, which by objective and structure are long-term investment products, should report performance figures that are aligned with the investment characteristics specific to their differentiated offering profile, and that a cumulative return since inception, including distribution costs, is most applicable for Shareholder Returns (With Sales Charge).

Presentation 2 Discussion: The IPA recommends that NAV Returns for non-listed BDCs be presented for the year-to-date period, rolling 1-year, 3-year and 5-year periods and since inception. The year-to-date and

1-year returns should be compounded quarterly (not annualized). The 3-year, 5-year and annualized since inception total returns should be the average annual total return for the relevant period, compounded quarterly. A cumulative total return since inception, compounded quarterly, should also be given. These return metrics are consistent with the calculation and performance figure tables published by other investment companies, such as mutual funds and closed-end funds. The IPA does not believe a performance figure for 10-year returns is necessary given that many, if not all, non-listed BDCs will have completed a



liquidity event prior to the offering’s 10-year anniversary. Because this performance figure relies on information included in non-listed BDCs’ financial statements filed with the SEC, NAV Returns generally may only be published, and returns compounded, quarterly.

Additional Presentation Guidance:

• If an unlisted BDC chooses to present its distribution rate prior to the availability of a twelve- month total return figure (1-year), disclosure must be included that highlights that the distribution rate does not represent the total return of the BDC. Once a total return calculation is available, the distribution rate and total return should both be presented, with the appropriate disclosures.

• If all or a portion of the distribution amount is sourced from offering proceeds or borrowings, then the following disclosure should be included in close proximity to the distribution rate: “IMPORTANT – Part of the distribution includes a return of capital. Any distribution that represents a return of capital reduces the estimated per share value shown on your account statement.”

3. Shareholder Returns (Without Sales Charge) definition, example of methodology and recommended disclosureDefinition: The compound annualized total return or compound cumulative total return for Shareholder Returns (Without Sales Charge) is the total return an investor received for the highlighted period taking into account all cash distributions paid during such period, compounded monthly. The calculation assumes that the investor purchased shares at the BDC’s public offering price, excluding any selling commissions or dealer manager fees, at the beginning of the applicable period and reinvested all cash distributions pursuant to the BDC’s distribution reinvestment plan. Valuation as of the end of the period is the redemption price pursuant to the BDC’s share repurchase program on such date.

Example:Current Public Offering Price, Excluding Selling Commissions and Dealer Manager Fees: $9.90 per share Current Tender Offer Repurchase Price: $9.90 per share

Public Offering Price, Excluding Selling Commissions and Dealer Manager Fees, 1-year prior: $9.675 per share

Public Offering Price, Excluding Selling Commissions and Dealer Manager Fees, 3-years prior: $9.45 per share

Public Offering Price, Excluding Selling Commissions and Dealer Manager Fees, at Inception (4-years prior): $9.00 per share



Weekly Distributions per Share: $0.01 per share 1-year Shareholder Return (Without Sales Charge): 7.8% total return 3-Year Shareholder Return (Without Sales Charge): 7.3% annualized total return

Since Inception Shareholder Return (Without Sales Charge): 8.2% annualized total return / 36.8% cumulative total return.

Additional Disclosure: Returns shown are historical and are based on past performance. Past performance is not indicative of future results. Shareholder Returns (Without Sales Charge) do not include selling commissions and dealer manager fees, which could total up to 10% of the public offering price. Had such selling commissions and dealer manager fees been included, the performance shown would be lower. Upon liquidation or redemption, market conditions may cause the values shown to be more or less than the actual values shown.

Discussion: Although most non-listed BDCs have a public offering price and tender offer repurchase price, the definitions of these terms vary slightly across sponsors. For example, the tender offer repurchase price for certain BDCs is 90% of their respective public offering price. For certain other BDCs, the tender offer repurchase price is that BDC’s NAV. Although both of these values represent the price at which an investor can tender his or her shares, the disclosures for each of the BDCs as it relates to calculating their returns will be different. To accommodate these differences, the IPA recommends it be the responsibility of each BDC sponsor to modify the recommended disclosure as necessary to explain differences in methodology.

The IPA recognizes that there may be situations where a BDC does not have a public offering price due to the completion of its public offering. In these instances, the IPA recommends that the purchase price for the applicable trailing period returns be the price at which shares at the beginning of the period were issued pursuant to the BDC’s DRP, which is the only method by which an investor could purchase additional shares in the BDC. The IPA recognizes that this may create situations whereby a BDC will use the applicable public offering price as the purchase price for the calculation of returns for one period and the applicable DRP price as the purchase price for the calculation for another period of returns. For example, if a BDC commenced operations in December 2010 and closed to investors in December 2012, the 1-year total return measured at December 31, 2014 will be calculated using a purchase price based on the applicable DRP price as of December 31, 2013. However, for the same BDC, the 3-year total return measured at December 31, 2014 will be calculated using the public offering price, excluding selling commissions or dealer manager fees, as of December 31, 2011. The IPA does not believe this methodology will have a material impact on the presentation of an unlisted BDC’s returns.



If a BDC publicly lists its shares on a national securities exchange, the IPA recommends that the redemption price is the closing price of the listed BDC’s stock as of the applicable date. The purchase price under this scenario should still reflect the BDC’s public offering price, excluding selling commissions or dealer manager fees, at the beginning of the period.

4. Shareholder Returns (With Sales Charge) definition, example of methodology and recommended disclosureDefinition: The compound cumulative total return for Shareholder Returns (With Sales Charge) is the compounded monthly total return an investor received for the highlighted period taking into account all cash distributions paid during such period. The calculation assumes that the investor purchased shares at the BDC’s public offering price (which includes the maximum selling commissions and dealer manager fees) at inception and reinvested all cash distributions pursuant to the BDC’s distribution reinvestment plan. Valuation as of the end of the period is the tender offer repurchase price pursuant to the BDC’s share repurchase program on such date.

Example:Current Public Offering Price: $11.00 per share

Current Tender Offer Repurchase Price: $9.90 per share Public Offering Price, 1-year prior: $10.75 per share Public Offering Price, 3-years prior: $10.50 per share

Public Offering Price at Inception (4-years prior): $10.00 per share Weekly Distributions per Share: $0.01 per share

Since Inception Shareholder Return (With Sales Charge): 23.1% cumulative total return

Additional Disclosure: Returns shown are historical and are based on past performance. Past performance is not indicative of future results. Upon liquidation or redemption, market conditions may cause the values shown to be more or less than the actual values shown.

5. NAV Returns definition, example of methodology and recommended disclosureDefinition: The compound annualized total return or compound cumulative total return for NAV Returns is the total return, calculated in accordance with U.S. generally accepted accounting principles using NAV performance and distributions for the period, compounded quarterly. NAV Returns equal the NAV per share as of the end of the applicable period, plus all cash distributions paid during such period, divided by the NAV per share as of the beginning of the applicable period.



Example:NAV as of September 30, 2014: $11.00 per share NAV as of June 30, 2014: $10.90 per share

NAV as of March 31, 2014: $10.85 per share NAV as of December 31, 2013: $10.80 per share NAV as of September 30, 2013: $10.75 per share

Quarterly Distributions: $0.21 per share 1-Year NAV Return: 10.5%

Additional Disclosure: Returns shown are historical. Past performance is not indicative of future results. NAV Returns represent the total return on the BDC’s investment portfolio rather than an actual return to shareholders. NAV Returns are disclosed in the BDC’s public filings with the SEC, which are available at www.sec.gov.

http://www.sec.gov

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