CONSHOHOCKEN, PA — Cox Capital Partners is launching a pilot lending program that would allow large investors in non-traded business development companies to borrow against their holdings rather than sell at a discount, offering an alternative for shareholders facing restrictions on withdrawing money from private investment funds.
The Conshohocken-based firm plans to offer loans equal to 50% to 65% of the net asset value of eligible holdings, initially targeting investors with positions of at least $1 million in non-traded business development companies, or BDCs, managing more than $1 billion in assets.
The proposed financing would provide shareholders with access to cash while their investments remain subject to the underlying funds’ periodic repurchase programs, according to Cox Capital.
Non-traded BDCs invest in private companies but generally lack the daily trading liquidity available to shareholders of publicly listed securities. Investors seeking to withdraw capital typically must rely on periodic repurchase offers, which may limit the amount of shares a fund will buy back.
Those programs frequently cap quarterly repurchases at approximately 5% of outstanding shares. When requests exceed the available capacity, investors may receive only partial redemptions and must wait for subsequent opportunities to recover the remaining capital.
Cox Capital’s lending structure is intended to address that constraint by advancing funds against shareholders’ existing investments while managing their requests for repurchases at net asset value, or NAV.
Loans are expected to carry fixed interest rates and initial two-year terms, with options for extensions. Financing would come from Cox Capital affiliates and institutional capital partners.
The company did not specify the anticipated interest rates or the amount of financing available through the pilot.
Under the proposed arrangement, investors would pledge their BDC shares as collateral and receive an advance based on the underlying fund and applicable underwriting criteria.
Cox Capital would submit the pledged shares for repurchase during each available redemption window. Proceeds from completed repurchases would be applied directly to reducing the outstanding loan principal.
Shareholders would continue receiving distributions exceeding their interest obligations.
The company does not expect to impose prepayment penalties when principal is repaid through a fund’s repurchase program.
Borrowers would also have the option of selling their remaining holdings to Cox Capital at the firm’s prevailing purchase price, with the outstanding loan balance deducted from the sale proceeds.
Repurchases would remain subject to each fund’s terms, applicable NAV and acceptance of redemption requests. The lending arrangement would not guarantee that shareholders could recover their entire investment through a fund’s repurchase program.
“Some shareholders need to exit immediately and are willing to accept our bid. Others would prefer to borrow against their investments while continuing to seek redemptions at NAV,” Chief Executive Officer John Cox stated.
“A seller pays a discount, a borrower pays a rate, and the investor decides how and when to access their capital.”
The lending program represents an expansion of Cox Capital’s existing business purchasing interests in non-traded BDCs and other illiquid investment vehicles through secondary-market tender offers.
Those transactions typically provide investors with liquidity at prices below reported net asset value, with discounts determined by market demand, fund-specific risks and other conditions.
The new financing structure would allow qualifying shareholders to retain their investments while borrowing against them, potentially avoiding an immediate discounted sale in exchange for interest costs and continued exposure to the underlying assets.
Cox Capital expects its existing tender offers to remain the principal liquidity option for most investors.
The pilot is aimed at the largest shareholder positions, which the company estimates represent approximately 1% to 5% of accounts in the targeted funds.
Eligibility will initially be limited to taxable investment accounts. Individual retirement accounts and other retirement accounts will be excluded.
The firm is recruiting financial advisors and directly registered shareholders for the initial program, which will be used to test the lending structure before any broader expansion.
Cox Capital has spent six years developing secondary-market liquidity services for retail private-market investors, working through independent broker-dealers, registered investment advisers and major brokerage firms.
The company is also working with custodians on arrangements needed to support the proposed financing program.
The timing and extent of any broader rollout will depend partly on those custodial arrangements, which remain at different stages of discussion.
Cox Capital is seeking participation from qualified investors, financial advisors and custodians as it evaluates the program’s operational requirements and potential expansion.
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