Fifth Street weighs sale – exclusive

Fifth Street Asset Management, the Connecticut mid-market lender that has been embroiled in a battle with activist investors over its two BDCs, is considering selling the investment advisor.  

Senior executives at Fifth Street Asset Management (FSAM) have been talking to market participants about potentially selling the investment advisor, according to sources.

The firm has drawn criticism from activist investors in its two BDCs, Fifth Street Finance Corp (FSC) and Fifth Street Senior Floating Rate Corp (FSFR), and has been subject to class action lawsuits in recent months.

The activist investors, including RiverNorth Capital Management and Ironside Partners, demanded strategic changes on the BDCs, new board members and / or replacing Fifth Street Asset Management as the investment advisor. They argue that management has continued to earn handsome fees while underperforming several benchmarks for years.

Fifth Street has since issued proxy materials defending its fee structures and saying the investment advisor is right for the platform.

Analysts and industry experts say Fifth Street may still be forced to replace the investment advisor if it loses the proxy battle. Management is now trying to get ahead of that by selling the investment advisory agreement first, sources said.

A Fifth Street spokesman declined to comment.

Sources tell PDI that Fifth Street’s founder Len Tannenbaum has been approaching “the usual suspects” among successful mid-market lenders and other BDCs about selling the company. It’s not yet clear which firms could be seriously considering a purchase.

One of the sources pointed out that selling FSAM which advises two publicly traded BDCs would be a complicated transaction, as the buyer would also take on its proxy battle and legal woes.

FSAM itself is also a publicly traded firm, making such a transaction all the more complicated. The value of FSAM’s stock has declined dramatically since going public in October 2014. It listed at $16 per share and finished trading yesterday (11 January) at less than $3 per share.

Another recent planned sale of an investment advisor to a BDC confirmed that such deals aren’t easy to finalise. Benefit Street Partners (BSP) which signed an agreement to acquire the investment advisor to TICC Capital Corporation in August, later wound up in a drawn-out proxy battle, with TPG Specialty Lending (TSLX) and Highland Capital competing for the acquisition and arguing that BSP’s offer was rigged. The planned sale ultimately didn’t go through, as it failed to gather enough shareholder votes on 22 December.

Meanwhile, American Capital (ACAS), which has been planning to spin out two publicly-traded BDCs, was also met with activist shareholder criticism from Elliott Management in November. The hedge fund said such a spinout would destroy shareholder value. American Capital has since embarked on a strategic review of its business.