These backseat words — Are we there yet? — are typically the bane of every parent taking the kids on a summer vacation in the family van or SUV. But increasingly they are also being heard at the watering holes and in the executive suites of the movers and shakers in the nonlisted REIT, nonlisted BDC, and direct participation program industry (collectively, “DPPs”). Unfortunately, the destination in question is not Disney World — it is the nadir of industry fundraising. And, based on April fundraising, it appears the industry has not yet arrived at that low point.
Overall DPP fundraising has been on a downward trajectory for more than three years, falling from a record $24.5 billion in 2013 to about $6.4 billion in 2016. The decline did not reflect a repudiation of the investment environment for the asset classes and industries in which DPPs operate. Rather, the introduction of new product structures and regulatory change and uncertainty all contributed to the decline.
Despite this “recession” in DPP fundraising, 2017 began with an expectant air of optimism. The account statement rules had been in effect for more than eight months, financial advisers were becoming more fluent with, and accepting of, the new share class structures, and preparations for the implementation of the DOL Fiduciary Rule were well along at most broker/dealer firms. Moreover, a major international real estate investment manager, Blackstone, had successfully introduced an NAV REIT in three wirehouses, and in so doing broke through a 30-year moratorium on the sale of retail nonlisted real estate products on Wall Street. Surely, the DPP industry had survived the downhill ride, seen the bottom, and was poised to move back up.
Not so fast. So far in 2017, the uncertainties have only compounded: the ultimate fate and final form of the DOL Fiduciary Rule; the impact on inflation, interest rates and economic growth of the Trump administration’s monetary policies; prospective legislative changes affecting the financial services industry; and so on.
The result of this logjam of uncertainty appears to be continuing paralysis among broker/dealers and financial advisers who recommend DPP products. Fundraising in April totaled only $393 million. The pain was felt in both major categories of DPP investment. Nonlisted REITs raised $297 million — the lowest month since August 2016. But what is most telling is that this low monthly fundraising included $105 million of sales of the Blackstone NAV REIT through the wirehouse channel. Excluding that new distribution channel, April fundraising for nonlisted REITs in the independent broker dealer channel was only $192 million — the lowest monthly total in more than 15 years.
The news is no better for nonlisted BDCs, which raised only $49 million in April — the lowest monthly sales since November of 2010 when the product was still in its infancy in the IBD channel.
Without a cure for the paralysis and an uptick in these sales rates, 2017 fundraising, even with wirehouse distribution of DPP products, is unlikely to surpass 2016 fundraising by a meaningful amount. The implications for the continuing integrity of distribution platforms, sponsor organizations, and broker/dealers are not pretty.
Kevin Gannon is chairman and CEO of Robert A. Stanger & Co.