Win-Win-Lose

NEWS

Monroe Capital LLC (“Monroe”), a premier boutique asset management firm specializing in private credit markets across various strategies, today announced it has entered into a definitive agreement to acquire Horizon Technology Finance Management LLC, (“Horizon”) (the “Acquisition” or “Transaction”). Horizon is the investment advisor to Horizon Technology Finance Corporation (HRZN)…

…Rob Pomeroy, Chief Executive Officer of Horizon added, “We are thrilled to partner with Monroe in the next chapter of Horizon’s growth. We feel that Monroe’s history of growth and innovation will be the perfect complement to building on the success that Horizon has enjoyed over the last 20 years. The Monroe platform has significant presence across the U.S. with over a 20 year track record and approximately $16 billion under management. We look forward to working with Monroe to greatly expand our position of market leadership in the venture debt arena.”

Monroe Capital Press Release – February 23, 2023

ANALYSIS

Surprise!

This acquisition of a smaller asset manager (Horizon Technology Finance Management LLC) by a mid-sized asset manager (Monroe Capital LLC) was on nobody’s projections for 2023 as far as we know.

However, there has been a multi-year trend of smaller external managers who control a BDC and/or internally managed BDCs getting gobbled up by bigger organizations.

Top Of Head

A non-complete list would include Triangle Capital, acquired by Barings BDC (BBDC); the Alcentra Capital BDC taken over by Crescent Capital (CCAP), which itself is owned 51% by Sun Life; Investcorp Credit Management US acquiring CM Investment Partners, which was the manager of public BDC CM Finance (CMFN), which became Investcorp Credit Management BDC (ICMB) and MVC Capital bought up by BBDC.

Not Done Yet

We’re on the record as predicting that the smaller managers/BDCs will continue to be acquired by their larger brethren for years to come.

For the buyers, it’s an opportunity to grow in size and importance at a stroke of a pen and for the sellers, it’s either a great way to “cash out” or to divest themselves of a problem to allow their energies to be directed elsewhere.

These are win-win situations for the management organizations involved, in most cases.

Remember Them

How shareholders fare, though, is more variable.

Sometimes the acquirer gets to be part of a larger organization, which may help with deal-doing and the volume of shares traded.

Often, but not always, the new manager offers some combination of permanent or temporary fee reductions.

Sometimes these are of material benefit while at other times the gains to the shareholders for being traded around like a baseball card are nominal.

Nothing New

We’ve not seen the official Proxy that will accompany a request for shareholder approval of this change in management but what we’ve read suggests no improvement in pricing for HRZN’s shareholders is countenanced.

VIEWS

Well Done

Horizon Technology Management has been growing its asset base very quickly in recent years, both at the BDC and by launching private funds – which we know very little about – that co-invest alongside its public vehicle.

They’ve now found a buyer for that larger fee base and seem to be both “cashing out” while also remaining behind to continue managing the business.

(How that works over the longer term remains to be seen).

Needs Saying

A transaction like this, though, does raise the question as to whether the Board of HRZN has ensured shareholders are getting the best possible “deal”, or are they just being shopped around for the convenience and pecuniary gain of the asset manager’s owners.

There’s no suggestion in the press release that the Board used this opportunity to determine if there was any other asset management organization that might be a better fit for the venture-debt BDC and/or might offer better compensation terms – thus generating better returns for the shareholders.

No Bargain

We won’t recap the current HRZN management and incentive fee terms – which can be found in any quarterly filing – because they’re highly complex. We can say, though, that the current compensation scheme – which Monroe Capital LLC intends to replicate – is one of the most expensive among public BDCs.

Roughly one in every three dollars HRZN generates in profits after paying its borrowing costs and operating costs goes to the manager.

Between 2016 and October 2022 (nearly 6 years), HRZN paid an unchanged monthly distribution of $0.1000 even as total assets increased 3.3x.

Between IIIQ 2016 and IIIQ 2022, total fees paid to the manager increased 4.9x even as shareholders were caught in a dividend version of Groundhog Day.

Asked And Answered

Will the Board of HRZN step up and negotiate better terms for its shareholders?

Will shareholders reject the change of manager when the upcoming vote occurs?

The answer in both cases is certainly NO.

What Are You Gonna Do

With no one to effectively represent their interests, BDC shareholders have few options.

They can sell their stock or just “grin and bear it”.

We imagine most will take the latter course.