NEWS

After the close on Tuesday April 17, 2018 Tennenbaum Capital Partners, LLC announced in a press release its acquisition by BlackRock, Inc.

Tennenbaum Capital Partners, LLC is the asset manager which serves as the Investment Advisor for TCP Capital Corp (TCPC), the publicly traded BDC.

Total assets under management at Tennenbaum Capital Partners, LLC is said to be around $9.0bn.

After the acquisition the principals and officers of the acquired firm will remain in place, including the management of TCPC.

No changes are envisaged to the principal terms under which TCPC is managed or any change in strategy mooted.

TCPC also published a brief slide deck describing the proposed transaction, which is expected to close in the IIIQ 2017. See above.

The presentation claims TCPC’s “shareholders will benefit from BlackRock’s global scale, industry expertise and portfolio and risk management expertise”.

The senior managers at Tennenbaum Capital Partners will assume “senior roles” in the management team at BlackRock, Inc.

ANALYSIS

Of the $9.0bn under management by Tennenbaum Capital Partners, LLC the BDC represents $1.5bn.

BlackRock’s assets under management total $6.3 trillion.

Credit assets, though, are listed at “$80bn +” and are backed by a team of 165 professionals.

BlackRock has a “proprietary investment and risk management system” called Aladdin.

VIEWS

Ka-Ching !

Although terms were not disclosed, this is likely to have been a very successful transaction for Tennenbaum Capital Partners and its principals.

Getting the nod from a firm as big as BlackRock and being asked to remain on to be involved in the management of the credit portfolio of the asset management client is a major compliment.

Wannabe

If anything, though, the transaction underlines our previously made point that BlackRock’s capabilities in middle market lending to date have been modest given the firm’s size.

As the AUM numbers above suggest, credit assets account for only a tiny portfolio of investments controlled: just over 1%.

Build or Buy

Like Apollo Global (APO) which purchased MidCap Financial, BlackRock Inc. has decided to buy-in credit expertise and origination capability rather than grow organically.

Where’s My Desk ?

We’ll be interested to see what greater responsibilities – if any – the Tennenbaum managers and professionals are actually given in the overall BlackRock credit organization.

If not used properly – and compensated and motivated appropriately – there may be the risk of turnover at all levels of the Tennenbaum group.

That would be a shame given the good performance of the BDC since going public.

No Ka-Ching For You

However, we cannot envisage any material changes to the fortunes of shareholders in the BDC in the short term – once the deal is closed.

TCPC shareholders are not gaining any better terms from the change in ownership.

Fees remain unchanged.

(We are not even sure if the change of control of the Investment Advisor requires shareholder approval but suspect that a vote will be necessary).

However, there is unlikely to be any shareholder pushback given the BlackRock brand.

No Tangible Benefit

Nonetheless, the BDC Reporter can’t help wondering aloud if the new ownership – and the much larger credit platform which BlackRock manages – will provide any material benefit.

Perhaps borrowing costs at TCPC (already pretty low at 4.1%) will improve.

Perhaps TCPC will have access to a greater number of larger, but appropriate, deals in partnership with other BlackRock funds.

Maybe Aladdin will magically offer up a bigger and better range of deals than Tennenbaum can source alone ?

We’re a little skeptical.

Intriguing

There are two issues,though,  which the BDC Reporter is most intrigued about and which we’ll be following closely in the months ahead:

First, we’ll be curious to see how BlackRock-Tennenbaum tackle the thorny issue of adopting the new asset coverage rules.

Return On Investment

Will TCPC, egged on by its new owner anxious to make a return on what must have been a pretty penny paid to the principals, leverage up its balance sheet ?

That would be done under the rubric of increasing earnings and taking advantage of the larger credit footprint and might have happened anyway had Tennenbaum remained independent.

The decision now, though, is not Tennenbaum’s alone but now also BlackRock’s.

{Technically the decision is made by the independent directors of the Board  but BlackRock will effectively be in the driving seat).

No word on this subject either before the deal was announced or in the press release and SEC filings.

We’ll probably not know till the acquisition is closed what the new owners want to do.

The Forgotten Sibling

Secondly, what is going to happen to BlackRock’s other public BDC: BlackRock Capital Investment (BKCC).

Curiously – and tellingly – no mention has been made even of the existence of the BDC in any of the announcements we’ve read.

Yet last time we checked BlackRock has a namesake fund – owned in all or in part for over a decade – and with three quarters of a billion dollars under management.

This Is What We Do

This is where we speculate because the principals are not telling us anything.

Will BKCC be eventually merged into TCPC to create a larger public BDC at a time when KKR and FS Investments are combining funds to create an $18bn behemoth ?

Unfortunately the principals of BKCC have not covered themselves with glory in recent quarters and the stock price languishes at a (20%) discount to NAV.

The stock price has risen of late (coincidence ?), but remains not far off its All Time Low.

Conclusion

Today, BlackRock and Tennenbaum are reassuring investors in the BDC that “business as usual” will continue once the deal is closed.

The stock price of TCPC is up modestly on the news.

However, depending on how the Tennenbaum organization fits into BlackRock’s plans to build up its credit business, and the approach towards using leverage and what might happen to BKCC, there could still be major changes ahead.

A year from now TCPC could look very much the same as today or very different, whatever a slide presentation says.