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2016 Postmortem
Related: About this forumInvestment Firm Hosting Clinton Fundraiser Is Under Regulatory Scrutiny
Bernie Sanders criticism of Hillary Clintons high-paying speeches to Goldman Sachs makes a valid point:
How does someone taking large sums of money from employees of some of the most powerful Wall Street firms, and, in the case of paid speeches, from the firms, themselves, provide an unbiased view of regulatory oversight of these firms?
It's a fair question.
Today comes a story from the Philadelphia Inquirer detailing a big-ticket fundraiser for Hillary Clinton scheduled for January 27, just days before the February 1 Iowa caucus, hosted by Philadelphia investment firm Franklin Square Capital Partners and its chief executive, Michael Forman:
Franklin Square Capital plans Clinton gala
Democratic presidential candidate Hillary Clinton will visit Philadelphia on Jan. 27 for a fund-raiser hosted by a group that includes lawyer-turned-investment mogul Michael C. Forman and former State Rep. Michael Gerber (D., Mont.) at their $17 billion "alternative investments" firm, Franklin Square Capital Partners.
Democratic presidential candidate Hillary Clinton will visit Philadelphia on Jan. 27 for a fund-raiser hosted by a group that includes lawyer-turned-investment mogul Michael C. Forman and former State Rep. Michael Gerber (D., Mont.) at their $17 billion "alternative investments" firm, Franklin Square Capital Partners.
What kinds of alternative investments does Franklin Square Capital Partners sell, primarily?
Unregulated, untraded, illiquid, highly-profitable (to Franklin Square) business development company (BDC) funds to smaller-ticket investors.
Heres the lowdown from a November 12, 2013 Forbes article:
The Overly Expensive, Tricky To Sell Investment Product Everyone Seems To Be Buying
Few top executives take their road shows as seriously as Michael Forman, chief executive of Philadelphias Franklin Square Capital Partners.
But Formans BDCs (FS Investment Corp, or FSIC, FSIC II and FS Energy & Power) are different. They dont trade on any exchange, so theyre illiquid. Theyre sold through financial advisers and broker dealers like LPL Financial and Amerprise. Many brokers love them because they carry outrageous fees (ones publicly traded BDCs dont have). Usually, its a 10% up front sales commission and then a 2-and-20 fee structure on assets and profits that partly goes to subadvisors like Blackstone. The structure provokes a chuckle from Sterne Agee analyst Henry Coffee, who covers the public BDCs. Asking about untraded BDCs, he says, is like asking, What do you know about radiation poisoning?
Few top executives take their road shows as seriously as Michael Forman, chief executive of Philadelphias Franklin Square Capital Partners.
But Formans BDCs (FS Investment Corp, or FSIC, FSIC II and FS Energy & Power) are different. They dont trade on any exchange, so theyre illiquid. Theyre sold through financial advisers and broker dealers like LPL Financial and Amerprise. Many brokers love them because they carry outrageous fees (ones publicly traded BDCs dont have). Usually, its a 10% up front sales commission and then a 2-and-20 fee structure on assets and profits that partly goes to subadvisors like Blackstone. The structure provokes a chuckle from Sterne Agee analyst Henry Coffee, who covers the public BDCs. Asking about untraded BDCs, he says, is like asking, What do you know about radiation poisoning?
The slick sales approach looks to attract small dollar investors to their highly profitable funds:
Franklin Squares advertising sells the BDCs as way into an exclusive club. A video on its Website features a solemn-voiced narrator, who intones, Only large investors like endowments, pension plans and financial institutions could afford to enter this world, of investing in private companies. The video cuts to an image of a closing door, then a picture of a frowning middle-aged couple. Continuing, the narrator says, There is a way for investors without multi million-dollar accounts to enjoy many of the same benefits as institutions
In person, a Franklin Square salesman can continue the easy pitch by mentioning the $5,000 minimum investments for anyone with $70,000 in net worth and $70,000 in income or $250,000 in net worth. Bragging about 7% yields on most of its funds helps too.
In person, a Franklin Square salesman can continue the easy pitch by mentioning the $5,000 minimum investments for anyone with $70,000 in net worth and $70,000 in income or $250,000 in net worth. Bragging about 7% yields on most of its funds helps too.
And Franklin Square has been reaping huge rewards while delivering poor returns:
Despite sub par returns for investors, Franklin Square is doing quite well. It now manages $7.8 billion in assets, up from $5 billion in December 2012 (ed. now at $17 billion). Meanwhile, revenue of the closely held company has skyrocketed 276.9% to $134 million from 2009 to 2012.
Franklin Square is selling these highly profitable funds that are completely unregulated by federal authorities. Back in March 2013, Bloomberg Business noted that the funds were beginning to draw regulatory scrutiny:
Brokers across the U.S. are tapping into demand for high-yield debt, and drawing regulatory scrutiny, by pushing investors into pools of risky loans that have extracted more in fees than theyve paid out in profit.
Franklin Square Capital Partners, the Philadelphia firm that created the securities about four years ago, said it took in $134 million of revenue last year, much of that passed on to Blackstone Group LP, which picks the loans and manages the portfolios.
The investments are luring individuals with annual payouts of about 8 percent and access to managers including Blackstone and KKR & Co. Brokerages generally take 10 percent upfront, several times the amount charged by similar junk-loan mutual funds, while management and performance fees rival those of hedge funds.
Franklin Square Capital Partners, the Philadelphia firm that created the securities about four years ago, said it took in $134 million of revenue last year, much of that passed on to Blackstone Group LP, which picks the loans and manages the portfolios.
The investments are luring individuals with annual payouts of about 8 percent and access to managers including Blackstone and KKR & Co. Brokerages generally take 10 percent upfront, several times the amount charged by similar junk-loan mutual funds, while management and performance fees rival those of hedge funds.
Investors in Franklin Squares initial $2.5 billion fund have paid a total of $323.5 million in commissions and fees since 2008, Bock wrote in the report. Thats 25 percent more than the $258 million it has distributed to investors, according to data compiled by Bloomberg.
Non-traded business-development companies on average have generated $2.40 in fees for every $1 in profit delivered to investors, according to Bock.
Non-traded business-development companies on average have generated $2.40 in fees for every $1 in profit delivered to investors, according to Bock.
No wonder they dont want federal oversight.
So why is Franklin Square throwing a big-ticket fundraiser for Hillary Clinton?
Well, not surprisingly, the Financial Industry Regulatory Authority (FINRA), an independent, not-for-profit organization authorized by Congress to protect Americas investors by making sure the securities industry operates fairly and honestly, announced on January 5, 2016 that funds of the type Franklin Square Capital Partners sells will be subject to rigorous reviews:
These sponsors are also offering unlisted business development companies (BDCs) (ed. what Franklin Capital Partners sells) to their product lines. Noting that each of these new products will be available to retail investors, who may be vulnerable to the complexity, high fees, and illiquidity of these investments, the agency will subject these products to rigorous reviews.
Is regulation on the horizon? The folks at Franklin Square Capital sure hope not. Protect the Golden Goose!
I think we can all rest assured that the big-ticket soiree thrown for Hillary Clinton by the bigwigs at Franklin Square Capital Partners just days before the Iowa caucus is being done just because they love, love, love Hillary. And not because federal regulators are scrutinizing their business and may decide that some regulatory controls are necessary in order to protect their small-ticket investors.
Or maybe, just maybe, Bernie is right...
These are the interests that have not only bankrolled her campaign. They have bankrolled her life.
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