The last word: The heavyweight BDC

How has the market responded to news of the listing?

I think it’s been very, very positive. We’ve met with most of the analysts who cover business development companies (BDCs), nearly a dozen or so, as well as some potential institutional investors and it’s been a positive experience. It’s all coming together and we’re gearing up for the April 16 listing.

We bring significant size and scale at $4.5 billion in assets under management and $2.4 billion of equity. We’ve got a strong, five-year track record – and we’ve got a fully built portfolio. Folks have been very excited.

You’ve got two entities that are partnering here – Franklin Square and GSO / Blackstone – both of which have good brands, good reputations and are very strong players. We’re unique in terms of how we raised our capital, coming to market with a fully built portfolio.

How did the partnership with GSO/Blackstone come about?

I’d known a few of the GSO folks and had done some deals with them. When we started Franklin Square in 2007, we were looking for a sub-adviser for our first fund, FSIC, and after looking at a number of credit groups, we made the re-connection with GSO. We were looking for the most dynamic credit platform, best track record. Having done the research, it was clear it was GSO.

Shortly thereafter – in 2008 – GSO was acquired by Blackstone. We then went through the due diligence process together. We knew what a great private equity firm Blackstone is, and it was a very good marriage in that we were looking to bring best-in-class institutional asset managers to the marketplace, and they’re a best-in-class institutional manager.

What sort of advantages has that relationship afforded?

They’re a leading credit firm and a leading private equity firm. They have significant access to transactions. GSO/Blackstone sits atthe center of the universe on the credit side, as well as across their platform – all of their businesses are terrific.

The relationship gives us access to deal flow, access to strategies that many other credit managers don’t have, just because of their size and reputation – and that helps drive our performance.

The BDC marketplace has really blown up over the last couple of years. There is currently legislation moving through Congress that would allow BDCs to increase leverage ratios to 2:1. Where do you stand on this?

We’ve been monitoring that in DC, and we’re generally in favour of it. If it’s implemented correctly, it makes some sense. We don’t think 2:1 leverage in this asset class is extraordinary if you look at how banks lever their balance sheets.

Some have pointed out that boosting the ratio would increase the possibility of a blow-up, and that if one BDC fails, regulators will turn a harsh eye towards the structure.

You know, they made it through 2008 without any big blow-ups. There were firms that struggled, but lived to fight another day.

2008 was a measuring stick and BDCs might have seen some volatility, but they did fine. Folks that invest in equity and mezz, subordinated debt, you wouldn’t want to provide more leverage on that. But BDCs – like us – tend to invest more at the top of the capital structure in senior secured debt, first lien, second lien. You could have some additional leverage and operate well.

So while you always have to be careful with leverage, we don’t believe that 2:1 leverage in the right kind of BDC is a real risky proposition with the right kind of underwriting standards.

Some BDCs do invest up and down the capital structure, however. There is an ability to invest in subordinated debt, should that opportunity exist. Is that something you have?

We maintain about 80 percent of our assets in senior secured credit. We’ll invest in subordinated debt on an opportunistic basis, but we’ll always have a focus on senior secured lending.

Michael Forman is the chairman and chief executive of Franklin Square Capital Partners. He is based at the firm’s office in Philadelphia.