3.10.3. Risk Factors
We have already mentioned some of the risks associated with investing in a DPP. It could be a blind pool offering, limiting an investor’s ability to evaluate the program’s ability to perform. The entity may not have any operating experience. Potential conflicts of interest by the entity’s ownership and management are a risk. Fees and other compensation must be paid regardless of the program’s performance, and will reduce distributions.
Other risks that affect the marketability or ability to redeem a DPP include the following:
• Credit Risk. Credit risk is the risk that an entity’s perceived or actual creditworthiness will drop, causing a reduction in its value and ability to borrow. In a worst-case scenario, the issuer will default. Credit risk is evaluated and graded by the credit rating agencies Standard and Poor’s, Fitch, and Moody’s.
• Liquidity Risk. DPPs are not readily traded on the market, and investors may have difficulty finding a buyer when they want to sell. They may be forced to sell at a discount to find a buyer.
• Leverage Risk. The DPP may not be fully funded with cash but may be highly leveraged with debt. Servicing that debt will decrease future distributions and subject the entit