The U.S. Securities and Exchange Commission (SEC) Division of Investment Management (the Division) just published guidance that will permit business development companies (BDCs) to co-invest with certain persons considered affiliates without obtaining exemptive relief. Under the Investment Company Act of 1940 (the 1940 Act), a limited partner (an LP) of a private fund that is under common control with a BDC would be considered a close affiliate of that BDC and thus prohibited from co-investing with that BDC regardless of the level of its equity ownership in the LP, unless it receives exemptive relief from the SEC. To date, the SEC has not granted such relief.
In the guidance, the Division states that an LP of a private fund owning at least 5% but no more than 25% of the private fund’s outstanding voting securities should be viewed as a remote, rather than a close, affiliate, thus requiring only board, but not SEC, approval for the LP to co-invest with the BDC. Acknowledging that an LP’s ability to co-invest with the BDC should not hinge on the private fund’s structure as a partnership, the Division concluded that the LP should be viewed as if it were a shareholder of a corporation for purposes of the 1940 Act in the context of BDC co-investment transactions. Presumably, an LP that owns less than 5% of the private fund’s outstanding voting securities would not be considered any type of affiliate of the BDC.
The original guidance issued by the Division is provided as a reference.