Highland Capital Management is a Dallas-based investment management firm with $19 billion in assets under management and a significant presence in the liquid alts space. In March, one of its alternative mutual funds – the Highland Floating Rate Opportunities Fund (HFRAX) – won the 2014 Lipper Award as the best-in-class for its category; and in late July, the firm demonstrated its commitment to integrity and transparency when it announced its compliance with the voluntary Global Investment Performance Standards (GIPS). But now the liquid alts pioneer is making a move into another alternative product space – illiquid, non-traded products.
Launch of Business Development Company
Last week, Highland Capital Management announced the launch of a Business Development Company (BDC) called NextPoint Capital, Inc. The BDC structure, which was created by 1980 amendments to the Investment Act of 1940, allows publicly registered U.S. companies to act somewhat like venture capital or private equity funds by investing in small and mid-size businesses. Highland’s BDC, NextPoint Capital, will be the first BDC to have a primary focus of investing in mid-sized healthcare businesses. The firm has a target goal of raising $1.5 billion in investment capital.
Brian Mitts, CEO of NextPoint Advisors and head of business development for Highland’s alternative products, says alternatives offer a “compelling, income producing and non-correlated investment option for investors,” and that adding non-traded products to his company’s existing mix of liquid alternative funds will “offer independent advisors one of the industry’s strongest and most robust product lineups.”
Range of Alternative Funds
In addition to the award-winning Highland Floating Rate Opportunities Fund (HFRAX), Highland Capital Management’s existing suite of liquid alternative funds includes:
Of the funds, the Highland Energy MLP Fund has had the best absolute performance through August 25, with year-to-date returns of 18.64%, but these gains actually fall short of the category average by 0.21 percentage points. Highland’s best-performing alternatives fund, in relative terms, has been the Highland Global Allocation Fund, which sits atop its Morningstar category with year-to-date returns of 11.72%.
The Highland Floating Rate Opportunities Fund, which won the 2014 Lipper Award, has generated one-year returns of 8.26% through August 25, which continue to place it at the top of its Morningstar category; but its year-to-date returns have slipped to 1.61%, which place the fund in the bottom 32% of bank loan funds.
Highland Capital Management also operates a liquid alts exchange-traded fund: The Highland/iBoxx Senior Loan ETF (SNLN), which tracks the Markit iBoxx USD Liquid Leveraged Loan Index, itself a subset of the Markit iBoxx USD Leveraged Loan Index. The fund invests at least 80% of its assets in component securities of the underlying index, and has posted year-to-date returns of 2.38% through August 25.
Highland Staffing Up
As part of Highland’s expansion into non-traded products, the firm hired Jennifer Ricci as Director of National Accounts back in February, and has also added a total of thirteen wholesalers for its wire-house and independent distribution channels. These new hires include Daniel Church from Franklin Square Partners, Anthony Hazen from BlueRock Real Estate, Kevin Helwig from Ascendant Capital/KBR Capital Markets, Michael Klisares from ICON Investments, and Matthew Selman from Dividend Capital Securities.
While increased liquidity and transparency are among the primary benefits driving interest in liquid alternatives, the shift of investor assets into liquid alts may leave opportunities “further down the liquidity spectrum” for entities like BDCs. NextPoint Capital simply represents Highland’s initial BDC product, but there are more in store to be launched later this year.