INTRODUCTION

Literally a second after publishing yesterday’s article about BlackRock TCP Capital’s (TCPC) new 52-week low price, we learned of the press release below and the major changes just announced in the BDC’s C-suite. We also learned – by Bloomberg – that the BDC’s external manager – BlackRock – was undertaking a major shake-up across its private credit businesses. So we’ll be plunging back into TCPC for a second day in a row, seeking once again to pinpoint what ails this BDC with a famous manager.

NEWS

BlackRock TCP Capital Corp. (NASDAQ: TCPC) today announced the following leadership transitions effective November 6, 2024:

Chairman of the Board and Chief Executive Officer Rajneesh Vig will resign his position as Chairman of the Board and CEO and will continue to serve on the Company’s Board of Directors until January 31, 2025 to ensure a smooth transition. Raj Vig made the decision to step back from those roles and to pursue other opportunities outside of BlackRock, Inc.

President Phil Tseng will succeed Raj Vig as Chairman of the Board of Directors and Chief Executive Officer. He has also been named Co-Chief Investment Officer.

Chief Operating Officer Jason Mehring will assume the role of President.

Patrick Wolfe, a senior investment professional with BlackRock’s US Private Capital platform, has been appointed Chief Operating Officer.

Dan Worrell, a senior investment professional with BlackRock’s US Private Capital platform, has been named Co-Chief Investment Officer with Phil Tseng.

September 16, 2024 – Seeking Alpha – BlackRock TCP Capital Corp. Announces Leadership Transitions

ANALYSIS

Significant

The departure of Rajneesh Vig is a material development. He was a key player, both at TCPC and at BlackRock, after being “acquired” from Tennenbaum Capital Partners in 2018. At Tennenbaum – the original manager of TCPC – he was the President of the BDC under Howard Levkowitz. When Mr Levkowitz retired from BlackRock in 2021, Mr Vig was elevated to the top spot at the BDC. Here is his bio:

Raj Vig, Managing Director, is a member of BlackRock’s Global Credit Platform and President and COO of BlackRock-TCP Capital Corp (NASDAQ: TCPC). He is Co-Head of US Private Capital (USPC) and is the Investment Committee Chair for BlackRock’s US Private Capital business.

Prior to joining BlackRock, Mr. Vig was a Managing Partner at Tennenbaum Capital Partners (TCP), where he was also Chairman of the Investment Committee and a member of the Management Committee. TCP with its more than $9 billion in committed capital was acquired by BlackRock in 2018. Prior to TCP, Mr. Vig held roles within Investment Banking, Debt Capital Markets and the Structured Solutions Group at Deutsche Bank Securities from 1999 through 2006.

He currently chairs the US Private Capital Investment Committee, is a member of the Credit Oversight Committee and serves on the Board of Directors of TCPC, 36th Street Capital and Edmentum. He also serves on the Board of Trustees of Connecticut College.

Mr. Vig earned a B.A. in Economics from Connecticut College and an M.B.A from New York University.

Something Bigger

This move was announced just as BlackRock announced “a new division, Global Direct Lending, appointing Stephan Caron, head of the European middle-market private debt business, to lead it”. Interestingly, the Bloomberg article which we’re quoting from – dated September 16, 2024 – also says that “Jim Keenan, the global head of BlackRock’s private debt business and a two-decade company veteran, will leave the firm next year”, along with Mr Vig.

Apparently – as per Bloomberg – this all part of BlackRock’s attempt to reboot the firm $35bn direct lending business and $86bn in private debt and to position itself to take a greater market share in a corner of the financial markets that its own head of macro research believes will double in size to $3.5 trillion by 2028.

BlackRock has a lot of catching up to do – according to Bloomberg:

While BlackRock oversees $10.6 trillion, it sits outside the top bucket in the booming private-credit markets and lags behind smaller firms such as Apollo Global Management Inc. and Ares Management Corp. that have dominated.

VIEWS

Tiny

TCPC, with its $2.0bn in portfolio investments, is only a tiny piece in BlackRock’s overall exposure to private credit, but a very visible one.

Unfortunately – and as we highlighted in our prior article – credit performance has been – and we’re choosing our language carefully – abysmal.

The BDC has booked ($86mn) in the last two and a half years, equal to (7%) of the BDC’s equity capital at par and the equivalent of more than a year’s Net Investment Income.

Since its launch in 2012, TCPC’s “Distributable Loss”, which includes both realized and unrealized deficits, comes to ($375mn), or (30%) of capital.

As of the IIQ 2024, the BDC had 10 non-accrual companies on the books out of 158. More worrying was that 6 new non-accruals were added in the period – more than any other BDC.

Of BDCs in its peer group only Oaktree Specialty Lending (OCSL) has come close to matching TCPC’s recent poor credit performance.

Why? Oh Why?

We track every BDC very carefully in matters of credit and TCPC – due to its challenges – even more than most.

However, there is no clear reason that we can point to why the BDC has under-performed where so many of its peers have not.

TCPC is lending into the middle market and upper middle market and most of its troubled loans are part of syndicates with other public and private BDCs.

The 6 most notable companies involved include the recent rogues gallery of Pluralsight; Thrasio; Khoros (aka Lithium Technologies); Magenta Buyer (aka McAfee), Anthology and Securus Technologies (aka Aventiv).

Just in those names we count 14 other public BDCs with exposure.

Included therein are Ares Capital (ARCC); Goldman Sachs BDC (GSBD); MidCap Financial (MFIC) and Palmer Square (PSBD), as well as OCSL

Worst Of The Bunch

However – and this may be telling – no other BDC has a presence in more than 3 of these companies and most are limited to one or two.

Even PSEC – with severe credit challenges of its own in recent times – has exposure only to Securus/Aventiv.

This suggests that either TCPC’s Investment Committee is either unlucky – after all this is a small sample group – or is not very good at credit selection – Job 1 of leveraged lending.

(Over) Confident ?

We have also noted that TCPC/BlackRock does have the courage of its convictions (or, put another way, is stubbornly confident against much of the evidence).

This is reflected in the huge amounts of capital shoveled into e-commerce aggregators since the pandemic. The companies involved include Thrasio, Razor Group and SellerX – all in the business of buying up small Amazon brands to create a scaled online retail experience.

Famously, the end of Covid caused a massive slump in that business and has resulted in multiple bankruptcies across the sector.

TCPC, though, had jumped in with both feet and as recently as its latest conference call was adamant that all will – ultimately – be well with its 4 investments in this one business group:

We remain optimistic that over the medium to longer term, the aggregator space remains attractive and that continued consolidation and cost optimization will result in fewer, larger scale and better capitalized lenders.

Since that pronouncement was made portfolio company SellerX was auctioned off after no buyer could be found, as discussed in the BDC Credit Reporter, which had this to say:

We continue to project that ultimate losses will be in the 50%-75% range but that will depend on how a prospective restructuring gets booked. At the moment, TCPC has written down its exposure by (55%).

BlackRock’s “aggregator play” may yet turn out alright.

The next year or two will be telling.

However, another BDC – finding a segment attractive – might not have bet so much on their insights.

Top Down

Also, from what we’ve gathered, BlackRock and thus TCPC, may suffer from an inflexible “command and control” approach to investment management – meaning that the most senior people demand to have the final word on most decisions.

This might work in the military, but often fails in the business world.

Unfortunately, we have no idea whether BlackRock has gone beyond re-thinking who sits in what office.

Chances are high that if there is a problem with the culture little is likely to change by changing out the CEO for his President and bringing in two new individuals from other parts of the same organization.

Hard To Do

Credit problems can be humbling for any organization – even those with trillions of dollars under management.

The first step in any correction is to admit that one even has a problem.

We’re not sure BlackRock is willing to concede as much and whether any course correction is envisaged or any concessions might be offered to long suffering shareholders.

One Idea

An impressive – but unlikely – move might be to suspend the Incentive Fee or come up with an arrangement more shareholder friendly than the current one which we find impossible to fathom.

All we know is that – at the current pace, BlackRock will be taking away ($25mn) in Incentive Fees in 2024 and ($67mn) since the end of 2021 – when NAVPS began to drop.

Shareholders would be better off by about $1.15 a share if those fees had been paid out to them.