Fifth Street still exploring growth options

Fifth Street Asset Management made its first share repurchases under an approved programme, while a similar plan for its largest underlying BDC hasn’t started yet. Its BDCs continue to trade below book.

Fifth Street Asset Management (FSAM) reported $4.3 billion in fee-earning assets under management as of 30 June, a 3.3 percent year-on-year rise. Meanwhile, Fifth Street Finance Corp.’s (FSC’s) fee-earning assets dropped following the sale of Healthcare Financial Group, a healthcare lender that was sold to MidCap Financial in June. Additional repayments and exits that exceeded origination levels also contributed to the decline in assets at FSC, said Len Tannenbaum, Fifth Street’s founder, chairman and chief executive, on the FSAM earnings call last week.

Tannenbaum acknowledged the challenges faced by the lender’s two BDCs which continue to trade at sizeable discounts to net asset value (NAV). As of the end of last week, FSC was trading at 0.71x NAV and Fifth Street Senior Floating Rate Corp. (FSFR) was trading at 0.73x book value. 

Fifth Street is still evaluating other options for growing its business outside of the BDCs, including ramping its CLO platform, working on the securitization of Senior Loan Fund II and raising money for its third senior loan fund. Tannenbaum is also exploring options like lending to small and mid-sized enterprises, acquisitions and adding teams to grow new product lines.  

One initiative that the firm has been focused on in the last nine months has been financial technology company MMKT that was launched by Len Tannenbaum’s brother David Tannenbaum and in which Fifth Street was a seed investor. “We’re in the process of raising capital from outside institutional investors in the form of convertible notes and subsequent to 30 June have closed an initial funding from our lead investor,” Tannenbaum said.  



FSAM’s shares have declined steeply in value since the firm went public in October last year. They opened at $16 per share on 30 October and were trading at $8.92 yesterday (17 August). Tannenbaum said the firm’s board of directors approved a $20 million share buyback program last quarter. During the second quarter, management purchased about $700,000 worth of shares on the open market. Despite the buy-backs, the share price has continued to fall from around $11 at the end of March. 

AT FSC, whose share price has also been challenged for some time, management had announced a share buyback program last fall but executives haven’t yet bought back any shares, an issue several analysts brought up on FSC’s own earnings call on 10 August. Todd Owens, chief executive at FSC, said on the earnings call that management plans to use its earnings in excess of dividends to repurchase shares. “We believe that buying back shares at these prices should provide a strong risk-adjusted return to our shareholders and increase our net asset value per share,” he said. 

Analysts on the call pointed out that the share buyback authorization expires in November and the executives haven’t implemented any buybacks yet. Owens responded saying he expects the board to re-authorize the program for a consecutive year. The program allows for $100 million worth of share buybacks, but FSC management now said it’d only invest money in excess of earnings. This quarter, that’s about $5 million. Barclays Capital analyst Terry Ma inquired as to why executives aren’t more aggressive about buybacks. “Our goal here is to improve profitability at FSC and we said that the right balance here is to use the excess earnings to buy back stock,” Owens replied. 

The BDCs management has continued to offer fee breaks on future equity raises, which analysts have highlighted doesn’t cut fees for existing shareholders and potentially implies an intention to keep raising equity while the vehicle is trading below book. “We considered our fee structures, we considered share buy-backs and we’ve considered the absolute level of fees and we continue to discuss those things,” said Owens responding to questions from Jonathan Bock, a senior analyst with Wells Fargo Securities. 

Bock’s research report on FSC said: “We see the FSC shares offering compelling discounted valuations, but whose discount is likely to remain based on the institutional investor view that FSC’s business provides primarily returns to the external manager first and shareholders second,” pointing to the lack of share buybacks.  

FSC’s assets dropped by $117 million to $2.6 billion from the prior quarter. Portfolio investments at the BDC totaled $2.3 billion at fair value spread across 32 companies as of 30 June. The BDC declared a monthly dividend of $0.06 per share in September, October and November. 

Net investment income also fell year-on-year: from $34.7 million for the three months ended 30 June 2014 to $32.5 million in the second quarter of 2015. Net income at FSAM overall rose to $10.4 million this quarter from $9.1 million in the same quarter last year.