Concerned about your investment in Oaktree Strategic Credit Fund BDC?
Oaktree Strategic Credit Fund is structured as a non-diversified, closed-end management investment company. On February 3, 2022, Oaktree Strategic Credit Fund was elected to be regulated as a business development company “BDC” under the Investment Company Act of 1940. This means that they invest primarily in privately negotiated loans to U.S. companies. The main investment objectives of this company is to generate stable current income and long-term capital appreciation.
BDCs – Shift in Performance
According to the BlueVault update on perpetual non-traded BDCs, there’s a shift in how BDC’s are performing. Fitch’s 2024 sector forecast for BDCs indicates a worsening outlook, anticipating diminished asset quality metrics due to heightened debt obligations for portfolio companies caused by rising interest rates and a difficult funding environment amidst an economic slowdown.
Minimal Losses, Up to Now: Perpetual non-traded BDCs, owing to their brief operational histories, still maintain comparatively minimal levels of investments categorized as non-accrual, averaging 0.3% of debt investments at cost and 0.1% at fair value as of September 30, 2023.
Overall, while BDCs can offer diversification and income potential to investors, they also come with unique risks and considerations that should be carefully evaluated based on individual investment objectives and risk tolerance.
Risk Factors of Oaktree Strategic Credit Fund BDC
Generally, non-traded Business Development Companies (BDCs) function similarly to non-traded Real Estate Investment Trusts (REITs). BDCs aggregate investor funds to invest in diverse businesses, particularly small and medium-sized enterprises, aiming to foster their growth. Successful ventures yield strong returns for BDC investors, often offering advantageous tax arrangements.
However, “middle-market loans” represent high-leverage financing for private equity-backed firms, carrying substantial credit risk. During economic downturns triggered by increasing interest rates and inflation, BDCs like Franklin BSP Lending Corp. may face significant challenges.
Investing in a business development company or BDC, is considered to be in the high risk category as far as security investments are concerned. There are certain principal risks that should be carefully considered before investing in Oaktree Strategic Credit Fund or any BDC.
Investment Risks with Oaktree Strategic Credit Fund
- Investments in privately owned small- and medium-sized companies pose a number of significant risks.
- Oaktree Strategic is exposed to risks associated with changes in interest rates, including the current rising interest rate environment.
- Oaktree Strategic generally will not control their portfolio companies and their investments in prospective portfolio companies which may be risky.
- When Oaktree Strategic borrows money, the potential for loss on amounts invested in them will be magnified and may increase the risk of investing with their company.
The Importance of Broker Due Diligence
When considering investments in BDCs, it’s crucial for your broker to undertake comprehensive due diligence to minimize the risks and verify that the investment suits your financial objectives. Due diligence entails that your broker is researching and analyzing a company to make well-informed investment choices. This process includes evaluating the BDC’s financial stability, portfolio composition, management team, and investment approach. Here are some essential factors to evaluate when conducting due diligence on BDCs:
Brokers have a fiduciary duty to act in the best interests of their clients. Performing due diligence helps ensure that the investments recommended or facilitated by the broker are suitable for their clients’ financial objectives, risk tolerance, and other relevant factors.
Broker dealers are required to perform adequate due diligence on any investment they recommend and to ensure that all recommendations are suitable for the investor. Recommendations should be appropriate in light of the investor’s age, risk tolerance, net worth, and investment experience. Broker dealers that fail to adequately disclose risks or make unsuitable investment recommendations can be held liable for investment losses in a FINRA arbitration claim.
Potential Lawsuits to Recover Investment Losses
The White Law Group continues to investigate potential claims against the broker dealers that sold high risk investments such as Oaktree Strategic Credit Fund BDC to investors. The high commission structure of these products leads to the possibility that unscrupulous financial advisors will push these products unsuitably to maximize their own commissions.
