Last week, I wrote an open letter to advisors about recent secondary liquidity missteps from sponsors titled, The Good, the Bad and the Ugly of Secondary Liquidity for REITs and BDCs, and, as bad luck would have it, another ugly example of ill-advised liquidity reared its head this week.
The subject here is a business development company named Franklin BSP BDC (formerly BDCA). Recently, that firm’s investors received a letter from MacKenzie Capital Management, a well-known – infamous? – real estate investment firm, “generously” offering to take the shares off their hands for $3.50/share. In truth, the proposal was anything but generous, representing a staggering 54% discount to the current NAV and a 45% discount to the most recent secondary market transaction.
The offer from MacKenzie comes on the heels of Franklin BSP’s $7.46 self-tender in December 2021 and, further, the company announced in an SEC filing two weeks ago (!) that it recently raised $60M in new shares at a price of $7.47 in a separate transaction. Yet, MacKenzie offered shareholders less than half of that number while portraying itself as a white knight. That’s pretty rich, as the saying goes … just not for Franklin BSP shareholders. And, as bad as this mini-tender seems, it is actually better than the price they offered shareholders this time last year, when they conducted a mini-tender at a price of $2.50/share.
Unfortunately for investors, firms like MacKenzie have a well-worn playbook that includes (a) painting a worst-case scenario for shareholders, (b) offering a low-ball price and (c) giving them a very short window to “act now,” just like a late-night infomercial.
Unfortunately, this vulture-like approach has been effective because unsuspecting retail investors, believing their shares are illiquid, assume the lowball offer is the best they can possibly get. This might have been the case a decade ago, when secondary liquidity for non-listed investments was almost impossible to find, and firms like MacKenzie were thriving as a result.
However, today, there are true secondary market platforms bolstered by reputable buyers, like Cox Capital Partners, who make investments based on earnings, quality of portfolio, track record, etc. Indeed, they are offering fair bids and offers in various non-listed alternative investments, making legitimate secondary liquidity a reality. A novel concept.
Yes, thanks to technology, ingenuity and a belief in fair and equitable markets, shares in previously illiquid assets can now be bought and sold easily. Investors can take control of their alternative investments and name their price, rather than being hoodwinked into bad deals by wolves in sheep’s clothing.
Before we close the door on this letter, I want to be clear that not all mini-tenders are created equal. The tool itself is not the problem, but instead it’s bad actors, like MacKenzie, who use the tool to manipulate and, ultimately, deprive investors of money they could receive in a fair and orderly market. It’s worth looking at the guidance that the SEC has provided on mini-tenders as well as the tips that they offer to these investors:
- “’Mini-tender’ offers – tender offers for less than five percent of a company’s stock – have been increasingly used to catch investors off guard. Many investors who hear about mini-tender offers surrender their securities without investigating the offer, assuming that the price offered includes the premium usually present in larger, traditional tender offers. But they later learn that they cannot withdraw from the offer and may end up selling their securities at below-market prices.”
- Investors need to scrutinize mini-tender offers carefully. Some bidders make mini-tender offers at below-market prices, hoping that they will catch investors off guard if the investors do not compare the offer price to the current market price.”
- “Investors who surrender their shares without fully investigating the offer may be shocked to learn that they cannot change their minds and withdraw. In the meantime, they’ve lost control over their securities and may end up selling at below-market prices.”
(Note: the bolded emphasis is mine.)
The bottom line is this: There are other opportunities for shareholders to experience pre-IPO liquidity at fair prices by transacting on secondary market platforms. And, as an advisor, you owe it yourself and to your clients to explore those options.
Brian King, CEO, Realto, Inc.