Activist investor demands change at Fifth Street BDC

Ironsides Partners has filed definitive proxy materials with the SEC requesting the election of new board members to the Fifth Street Senior Floating Rate Corp (FSFR) BDC and demanding that the investment manager be replaced.  

Ironsides Partners, an investment firm that holds a 6.4 percent stake in the Fifth Street Senior Floating Rate Corp (FSFR), filed definitive proxy materials with the Securities and Exchange Commission (SEC) demanding changes at the business development company (BDC).

The activist investor accuses FSFR of grossly underperforming while paying excessive incentive fees to the BDC’s external manager.

Ironsides has requested the election of its own chief investment officer Robert Knapp and another representative, Richard Cohen, to FSFR’s board of directors at an upcoming annual meeting of shareholders on 7 April.

The firm is also arguing that stockholders should vote to terminate the company’s advisory agreement with Fifth Street Management.

Ironsides pointed out that FSFR’s stock price had fallen to $7.57 last week from $15 per share when it listed in 2013. The shares trade at a 33 percent discount to its net asset value (NAV).

“FSFR stock has produced a dismal negative 37 percent return since its IPO, including reinvestment of dividends,” Ironsides said in its statement. Despite the capital losses suffered by shareholders, as of 30 December, FSFR has paid $8.3 million in incentive fees to its external advisor.

The BDC has underperformed relevant indices, the filing highlights. It was down 21.7 percent for the 12 months of 2015, versus losses of 3.2 percent by the S&P 500 while the BAML US High-Yield Index lost 5.5 percent. Ironsides’ complaint also criticises FSFR for issuing a dilutive share offering in 2014, when FSFR sold 22.8 million shares at a 15 percent discount to NAV.

The activist argues that the best solution is to sell the company.

Given that the BDC’s portfolio is concentrated on floating rate senior loans, it carries less risk than a lot of peers, so the trading discount is “all the more perplexing”, Ironsides said. Several BDCs, including Golub Capital BDC, TPG Specialty Lending, the Goldman Sachs BDC and Triangle Capital Corp are still trading at or above their NAVs. “We would gladly accept shares from any of these BDCs in exchange for FSFR shares,” Ironsides said.

Ironsides’ Knapp told PDI he began building a stake in the company last year.

River North Capital Management, another activist investor, filed similar materials against the Fifth Street Finance Corp (FSC) last year, but withdrew these accusations after Fifth Street settled with River North recently. “They were thinking along similar lines and came out against FSC around the time we filed against FSFR. We were pretty frustrated that they settled, but someone gave them a price they can’t refuse,” Knapp said.

Fifth Street responded to the accusations last week by filing its own letter to stockholders, arguing that Ironsides’ proposed director nominees aren’t qualified to serve on the board, have been rejected from past board nominations and have poor track records. The BDC also once again defended its investment strategy and fee structure.