By Tim Dulaney, PhD, FRM
In our experience, retail investors are being sold increasingly obscure and non-conventional investments. An investment that raised our eyebrows recently is the Priority Senior Secured Income (PSSI) Fund. The PSSI Fund is the first regulated investment company that invests primarily in leveraged loans and collateralized loan obligation (CLO) tranches lower in their capital structures.
Unlike the mutual funds with which most retail investors are familiar, PSSI Fund investors are not able to redeem shares daily at the fund's net asset value. Investors will have neither an observable market price nor any opportunity to sell shares in the secondary market.
The PSSI Fund, like other non-traded investments (e.g. non-traded REITs), is an extremely high-cost offering. Its upfront fees of at least 9% and annual fees of over 8%, in addition to the high cost of its underlying structured finance investments, require persistently high returns on its portfolio to generate a positive internal rate of return for fund investors.
We recently completed a short white paper (PDF) analyzing the structure of the PSSI Fund in detail. We believe the complexity and high-cost structure of the PSSI Fund is not likely to be appreciated by brokers or retail investors and, as a result, the structure raises questions of suitability.
The fund is currenting in the offering period and we'll continue to follow the fund as it accumulates investors. For more information, see the PSSI Fund prospectus, the most recent annual report, and recent prospectus supplement.
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