Friday letter: Why the TICC debacle matters

The battle over TICC Capital is a colourful spectacle that both encapsulates and distracts from the burning issue for BDCs: poor performers drag the whole sector down.

Three different firms have now thrown their hat in the ring (in one form or another) in the bidding war for Nasdaq-listed business development company TICC Capital Corp.

Since its initial public offering in 2004, TICC’s total return has hit 51.6 percent. In the same period US Treasuries have returned 60 percent, while the BDC composite, an index of 15 BDCs, has returned 206 percent.

That poor performance triggered a sale process and the battle commenced after the credit arm of Providence Equity Partners’, Benefit Street Partners, announced that it would acquire TICC’s investment manager for $60 million. Rival offers then came in, one for the BDC itself rather than the managers – meaning any cash would go to shareholders rather than the owners of the investment advisor.

Highland Capital Management affiliate NexPoint Advisors’ cut-price fees and $10 million share repurchase offer was quickly rejected and isn’t viewed as the frontrunning counter-offer. Eyes are rather trained on the war of words between the board of TICC and TPG Specialty Lending (TSLX), which launched a rival offer after TICC unveiled the plan to sell its investment manager to Benefit Street Partners (BSP) for $60 million.

TSLX’s chief executive Josh Easterly didn’t mince his words when discussing the situation during a panel focused on BDCs at the recent PDI Forum in New York. He excoriated TICC’s decision to pay $60 million to dislodge what he characterised as an underperforming manager that should have been fired when its contract came up for renewal (an annual regulatory requirement). The BSP deal, he argued, equated to a $60 million transfer from shareholders when TSLX’s offer would give shareholders a 20 percent premium on the share price the day before the proposal was made.

TICC has launched a counter-attack defending the board’s vote in favour of BSP’s offer. Meanwhile, NexPoint, which made the first counter-offer in August and was rejected by TICC at the same time as TSLX, is now suing TICC alongside a sweetened offer for the BDC.

TICC shareholders are due to vote on the BSP proposal on 27 October.

The saga is interesting because it has forced BDC watchers and investors to consider the impact of poorly performing managers on the sector overall; Easterly argued the industry had a responsibility to call out and mitigate poor performers so as to not drag others down.

Talking to one BDC investor recently, PDI asked which firm’s offer he thought was best for TICC’s shareholders. The investor said it ultimately didn’t matter: the important thing was that TICC shareholders get rid of their current consistently underperforming manager.

That’s a message that the whole sector should listen to.