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Fifth Street Asset Management Being Sold To Oaktree Capital

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According to news reports, Fifth Street Asset Management (FSAM) is being sold to Oaktree Capital Group,Inc Oaktree is a publicly-listed asset management firm, based in Los Angeles. Its symbol is OAK.

The purchase price is said to be $350mn, according to Dow Jones, quoting “some of the people”.

GOING,GOING,GONE

As BDC Reporter readers will know FSAM has been on the block for weeks, with the pressure rising as the management company has been about to default on its bank debt and needed a guaranty from its CEO and founder to ensure that liquidity would be sufficient to pay off any debts if an impasse were to occur.

Not unexpectedly, the share prices of both Fifth Street Finance (FSC) and Fifth Street Senior Floating (FSFR) – both of whom are managed by FSAM – jumped in intra-day trading on the news that a well established asset manager will be taking the reins from FSAM, in which all stakeholders had lost confidence.

While we have no details about this deal (even though someone had advance notice and was buying up shares yesterday in FSAM), the value in the management company is in its advisory contracts with the two public BDCs. All the other FSAM funds or ventures are being wound down or are already closed.

Technically the Boards of both BDCs – and probably the shareholders at some point – will have to approve a new Oaktree manager.

However, given the alternative we doubt there will be much push back.

Greasing the wheels is that Mr Tannenbaum – whose been buying stock for months in both BDCs – is a major shareholder and will presumably be opening his arms to and voting on behalf of the new Investment Advisor.

MORE ON OAKTREE

Copied shamelessly from the website in order to bring readers up to date:

Oaktree Capital Management is a leading global alternative investment management firm with expertise in credit strategies. The firm was formed in 1995 by a group of individuals who had been investing together since the mid-1980s in high yield bonds, convertible securities, distressed debt, real estate, control investments and listed equities. Today, Oaktree comprises over 900 employees in Los Angeles (headquarters), New York, Stamford, Houston, London, Paris, Frankfurt, Amsterdam*, Dublin*, Luxembourg*, Dubai, Hong Kong, Tokyo, Singapore, Seoul, Beijing, Shanghai and Sydney. We have 30 portfolio managers with average experience of 23 years and over 700 years of combined investment experience.

The firm’s competitive advantages include its experienced team of investment professionals, a global platform and a unifying investment philosophy. This investment philosophy, which consists of six tenets – risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing – is complemented by a set of core business principles that articulate Oaktree’s commitment to excellence in investing, commonality of interests with clients, a collaborative and cooperative culture, and a disciplined, opportunistic approach to the expansion of offerings.

As a result of consistent application of our philosophy and principles, Oaktree has earned a large and distinguished clientele. Among Oaktree’s global clients are 75 of the 100 largest U.S. pension plans, over 400 corporations around the world, over 350 endowments and foundations globally, 16 sovereign wealth funds and 38 of the 50 primary state retirement plans in the United States.

Our expertise investing across the capital structure has allowed us to cultivate a diversified mix of global investment strategies in six categories: distressed debt, corporate debt, control investing, convertible securities, real estate and listed equities. Importantly, the expansion of our strategies has been achieved primarily through “step-outs” into highly related fields, based on identifying markets that (a) we believe have the potential for attractive returns, and (b) can be exploited in a manner consistent with the firm’s risk-controlled philosophy.

INITIAL CONCLUSION

We are writing this within 15 minutes of getting the news, and will have further thoughts in the future. For the moment this is playing out as expected: FSAM had to sell. A big asset manager saw an opportunity to gain not one, but two, BDC advisory contracts without all the fuss and muss of setting up new funds, making loans and building a track record, and jumped.

FSC and FSFR shareholders – who might otherwise have balked at being handed over to a third party firm without the benefit of the Board exploring if a better deal could be had elsewhere – are primed to be thankful and relieved.

FSAM shareholders – and its principals – despite steering very close to the rocks of a loan default or even bankruptcy, make a big pay-day on the backs of an investment advisory contract that’s supposed to be cancellable at any time on 60 days notice, but which has become a major asset to be traded.

Mr Tannenbaum’s investment in FSC and FSFR stock, which was greatly devalued because of the actions he took in recent months, bounces back in value and provides the possibility of another last-minute recovery there.

WHY YOU SHOULD READ THE BDC ACTIVIST. IF WE WERE STILL PUBLISHING IT.

This whole, complex and unsatisfying saga (which is not yet over) can be laid at the feet of poor BDC corporate governance which imbues the insiders  with almost total control – and makes the Board a mere rubber stamp for decisions taken elsewhere and shareholders outsiders looking in.

We’ve written extensively about the subject under our BDC Activist moniker, but most readers are more interested (understandably) in what to invest in next than hearing an exposition of how BDC corporate governance fails them.

Nonetheless, this episode should remind BDC investors that your interests come far down the list of priorities of the insiders who control your fund, and that will eventually show up in strange and mysterious ways.

In this case by insiders of one firm transferring the management of your BDC – after the loss of a huge amount of your capital – to a third party which you learn about by a press release at mid-day on a Thursday.

THE GOOD NEWS

Some insiders, though, will behave better than others where shareholders are concerned.

Mr Tannenbaum and FSAM have set the bar so low (in fact we suspect deliberately low in recent months as part of the gamesmanship involved in getting this rubix cube of a deal done) that the BDC shareholders welcomed a take-over by a new firm under unknown terms and applying an unknown business strategy with a double digit increase in the stock price.

FULL DISCLOSURE

As the BDC investor – as opposed to the BDC Reporter- we took a position in FSC and FSFR weeks ago on hearing of FSAM’s interest in being bought out. Our view was only confirmed when we learned FSAM was feverishly negotiating with its secured lender and Mr Tannenbaum had been called in to support the management company (on unstated terms) should things go wrong. At first we had thought Mr Tannenbaum might seek to take FSAM private and retain control over FSC and FSFR. However, we quickly realized that a sale to a tthird party of FSAM was not only favored but necessary and continued oversight by the management company of its public BDCs effectively impossible.

We thought Ares Management might be the buyer and possibly FSC and FSFR might get folded into that market leading BDC. Or FSC and FSFR might be merged and managed separately by Ares Management. We were guessing, and we said so. The word wild was used more than once.

Otherwise, though, things have played out as we presumed initially. Except that we didn’t know who would buy FSAM. Oaktree is one of the best names we could have hoped for.

The next shoe to drop, though, will be how Oaktree approaches the FSC and FSFR shareholders and Boards. Will they treat their new funds as conquered territory, lucky to get anything that is doled out or will new terms be offered up to encourage investors to stick with two BDCs that have been terrible disappointments and have performed very poorly ?

If Oak Hill goes the former route, after the initial excitement dies down, the surge in the stock prices will flatten or reverse.

If Oak Hill goes the latter route, both BDCs might see a further jump in value as shareholders re-engage with funds that have essentially been left for dead in recent months.

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