Oaktree Capital to take over two Fifth Street BDCs in $320 million deal

New owner plans to replace management and lower fees, increasing returns

Jul 17, 2017 @ 2:23 pm

By InvestmentNews

+ Zoom

Oaktree Capital Group, a Los Angeles-based alternative investments manager, will pay $320 million in cash to Fifth Street Management to become the investment adviser to two business development companies: Fifth Street Finance Corp. and Fifth Street Senior Floating Rate Corp.

Edgar Lee, an Oaktree portfolio manager, is expected to serve as CEO of both BDCs, which together have approximately $2.5 billion in assets under management across first lien, second lien, uni-tranche and mezzanine credits, Oaktree said in a release. Following the transaction, which is expected to close in the fourth quarter, Fifth Street Finance Corp. will change its name to Oaktree Specialty Lending Corporation, and Fifth Street Senior Floating Rate Corp. will change its name to Oaktree Strategic Income Corporation.

(More: Nontraded BDC sales sink like a stone in 2016)

Oaktree said it will replace FSM as the investment adviser to the BDCs, and an Oaktree affiliate will become their administrator. It also said it will reduce the management fee for First Street Finance Corp. to 1.5% from 1.75%, and the incentive fee to 17.5% from 20.0%, covering income and capital gains. The incentive fee for Fifth Street Senior Floating Rate Corp SFR also will be reduced to 17.5% from 20.0%; the current management fee rate of 1.0% will remain unchanged.

The Fifth Street website says that in addition to the two public BDCs being sold, the firm manages several private investment vehicles, which were not mentioned in the transaction.

When Fifth Street Finance filed its first quarterly report as a public company in 2008, it reported a book value of $13.20 per share, according to the Motley Fool.

"But after a long list of bad investments, dilutive equity issuance and run-ins with the SEC about its financial reporting, the BDC last reported book value of $7.23 per share, roughly 45% less than where it began," the site said.

(More: Nontraded BDC to pursue listing on national exchange)

Once the acquisition is concluded, Oaktree said all current FSC board members except Richard P. Dutkiewicz, and all current FSFR board members except Richard W. Cohen, have agreed to resign. Each BDC board has nominated Marc H. Gamsin, Craig Jacobson, Richard G. Ruben and Bruce Zimmerman as new independent directors, and John Frank, vice chairman of Oaktree, as a new interested director of the board. Mr. Frank also is expected to serve as chairman of each BDC board.

Oaktree is headed by Jay Wintrob, former president and CEO of AIG Life and Retirement.

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