Crescent BDC to acquire Alcentra Capital for $142m in cash, stock

Alcentra BDC shareholders will retain 19% of the combined entity, while the buyer will reduce its management fee and up its hurdle rate.

In the latest example of business development company M&A, Crescent Capital BDC is set to acquire Alcentra Capital Corporation following the latter’s strategic review and an activist campaign.

Los Angeles-based Crescent will pay New York-based Alcentra Capital $141.9 million, or $1.68 a share, in a cash-and-stock transaction. The compensation consists of a $19.3 million cash payment alongside another $21.6 million from the Crescent BDC advisor and 5.2 million shares in the acquiring vehicle. Alcentra Capital’s stock was up more than 13 percent in afternoon trading Tuesday.

Once the deal closes, which is expected in the fourth quarter, Crescent will own 81 percent of the combined BDC, while Alcentra Capital shareholders will own 19 percent. More than two-thirds of Crescent shareholders have agreed to vote in favour of the transaction. The resulting entity will trade on the Nasdaq exchange under the ticker CCAP.

“We have made significant progress rotating our legacy portfolio and stabilizing [net asset value] over the past four quarters,” Alcentra Capital chief executive Suhail Shaikh said in a statement. “We are now in a much stronger position and, through the combination with Crescent BDC, will create a larger BDC with a highly complementary portfolio that offers immediate additional value for our stockholders.”

Crescent BDC CEO Jason Breaux said: “We believe this transaction is the right next step in the development of our BDC and provides our investors with improved scale and flexibility as we continue to enhance our private credit capabilities.”

Crescent BDC will decrease its management fee from 1.5 percent to 1.25 percent and institute a hurdle rate of 7 percent rather than 6 percent; the vehicle will still charge a 17.5 percent incentive fee.

Crescent BDC has provided a partial management fee waiver as well, meaning the advisor will charge 0.75 percent for the first six quarters post-closing. It will also waive the income-based portion of the incentive fee. In addition, Crescent BDC’s advisor authorised a 12-month $20 million share buyback programme.

“This one takes [BDC fee structures] the next step. We haven’t seen the 1.25 percent base management fee level,” JMP Securities BDC analyst Chris York said, adding that many new-entrant BDCs charge a 1.5 percent management fee (York said he owns Alcentra Capital stock).

Managers looking to attract new investors, he noted, need to give publicly-traded institutional investors a compelling reason to put money into a new vehicle versus buying a seasoned issue, and among the considerations are fees. Other BDCs York anticipated as potential acquirers were those targeting lower mid-market companies.

Alcentra Capital announced a strategic review in April after investment firm and family office The Stilwell Group began an activist campaign. The shareholder launched a proxy contest when it nominated the firm’s director of research, Corissa Porcelli, and a financial services lawyer, Michelle Bergman of Bergman Law, earlier this year.

In early 2018, Alcentra said it would change strategies from deploying subordinated debt into lower mid-market companies to investing in the senior debt of larger companies, after describing 2017 as a “challenging year”.

Crescent BDC is advised by Crescent Capital Group, a $25 billion credit manager with strategies that include mezzanine, special situations and European lending, among others. Alcentra Capital is advised by Alcentra, which is part of the Bank of New York Mellon and oversees $37 billion.

Editor’s note: Updated to include quote from JMP Securities’ Chris York.