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January 2, 2009 Issue |
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The Most Powerful Name In Corporate News and Information |
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Energy | Resources | Mining | Healthcare | Bank | Services | Semiconductor | Biotechnology | Communications | Waste-Management |
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Capital Goods | Canadian | Technology | Green | Retail | Security | Authentication | Business-Banks | Oil & Gas | Community Banks |
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Drug-Development | Financial | Clean Energy | Specialty-Finance |
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CURRENT ISSUE | COVER ARCHIVES | INDEX | CONTACT | FINANCIALS | SERVICES | HOME PAGE |
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More Than Just Financing, Fifth Street Finance Corp. Provides Their Private Equity Sponsor Clients Help In Just About Every Facet Of Their Business |
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Fifth Street Finance Corp. is a specialty finance company that lends to and invests in small and mid-sized companies in connection with an investment by private equity sponsors. Fifth Street Finance Corp's investment objective is to maximize its portfolio's total return by generating current income from its debt investments and capital appreciation from its equity investments. |
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Leonard M. Tannenbaum is the President and CEO of Fifth Street Finance Corp. as well as the founder and managing partner of its investment adviser.
Since founding his first private investment firm in 1998, Mr. Tannenbaum has founded a number of private investment firms, including Fifth Street Capital LLC, and he has served as managing member of each firm. Prior to launching his first firm, Mr. Tannenbaum gained extensive small-company experience as an equity analyst for Merrill Lynch and as partner in a small hedge fund. Mr. Tannenbaum has served on the Boards of Directors of five public companies, including Einstein Noah Restaurant Group, Inc., Assisted Living Concepts, Inc. and WesTower Communications.
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Interview conducted by: Lynn Fosse, Senior Editor, CEOCFOinterviews.com, Published - January 2, 2009
Mr. Tannenbaum: “FSC is our 4th investment vehicle. The vision is to create an environment where we are a value added provider of capital. Our clients are private equity sponsors with $100 million to $500 million in fund size. The idea is to provide not only financing, but help in terms of finding companies, driving revenue to the portfolio holdings, making strategic decisions, and basically helping our clients, the private equity sponsors, with every facet of their business.”
CEOCFO: What does Fifth Street Finance Corp. know that allows you to do that successfully? Mr. Tannenbaum: “It’s taken 10 years since we founded the firm in 1998, to really define the vision and accomplish it. We currently sit on over 40 boards of directors of small and mid-sized companies. We have worked closely with our clients and private equity sponsors in developing their business, fund raising and growth plans, etc. These partnerships have taken years to develop and we are very proud of the accomplishments that our clients have achieved.”
CEOCFO: What has changed for you over the past couple of months and how is the current economic environment affecting Fifth Street? Mr. Tannenbaum: “We were one of two financial services IPOs this year. To go public in June with a lead of Goldman Sachs was an accomplishment that has taken us years to achieve. Permanent capital enables us to provide flexible finance solutions for our clients. We are able to recycle our capital. Being public and having capital in the current environment allows us to capitalize on the plethora of lending opportunities. This lending environment is very good because there were a number of players in the market last year that should not have been there, such as hedge funds. The CDO-CLO fiasco created an environment where risk taking was too easy. Many of these non-traditional players in the lower-middle market created a pricing problem. Through this period we stayed very price disciplined. Now having all of those players out of the market for a year, will help us in terms of developing strong relationships with our private equity sponsors as well as driving strong risk reward for our shareholders.”
CEOCFO: One of the things that you pride yourself on is transparency; which is so important today. You seem to have been ahead of the game! Mr. Tannenbaum: “The concept of transparency started with being a private fund. Many of the public business development companies today did not start the way we did. We started as a private fund in 1998. Having LPs (Limited Partners) in our fund like Dupont and Sumitomo, which in one case attended every investment committee meeting for a year, reinforced our practice of full disclosure and transparency. When we went public, we were very surprised at the lack of transparency that many of our peers provided. We continue to try to enhance transparency, both through monthly newsletters and through showing the debt to EBITDA of the rating tranches, of which we are the only BDC doing so. Furthermore, we mark our securities appropriately. We mark down our securities when they have a credit problem, which I believe many of our peers don’t properly do. Over time, the trust that you can build with the investors by doing the right thing should generate a strong price to book multiple. We have very active shareholders who want to see a very high detailed level of transparency.”
CEOCFO: You have a strong focus on managing credit risk; would you tell us about your thinking and procedures there? Mr. Tannenbaum: “I think we manage credit risk well. We do it with a different approach, however. We don’t only underwrite the actual security, we also underwrite the sponsor. By underwriting the equity sponsor, we find out how successful they have been in their funds, how they have reacted to lenders in the past, if they support their companies, and if they are a top quartile performer. We only choose to work with private equity firms that are top quartile performers. We have found that the time we spend on diligence of the private equity firms is a real risk mitigate. It lowers the projected default rate, because the private equity sponsor supports their companies. In talking to many of our peers, I think that we do a similar analysis in terms of debt to EBITDA and stress testing. What I think we do differently on that side is we have tighter covenants and we often have more covenants than many of our peers. I think in this environment, lenders as a whole are having tighter and more robust covenants.”
CEOCFO: Are there any particular industries that you are focused on for the transactions? Mr. Tannenbaum: “FSMP II was 50% healthcare focused. I think the public entity should be more healthcare focused than we are today and we are adding health care exposure. This is because we really understand both the medical device and healthcare services industries. Other specialties include manufacturing and infrastructure. Our most successful exit in this environment was a franchise of commercial office cleaning which was sold earlier this year by JHW Greentree Capital. We are diversified across numerous industries; we even invest in technology services. We don’t invest in companies with high levels of commodity risk. Over our ten year history, Fifth Street has developed a broad expertise in a wide variety of industries.”
CEOCFO: What is the financial picture like for Fifth Street today? Mr. Tannenbaum: “We just reported our 10K and year end results last week. We also reported not only the 1st Quarter dividend but also the 2nd Quarter dividend. Both dividends grew, quarter-over-quarter. That would indicate that we are doing very well. Relative to our peers, I think we are doing extremely well. There’s no question that the economic slow down affected our portfolio, specifically the consumer exposed companies, which make up about 15% of our portfolio. We have three securities that have been negatively affected and we have written down those securities substantially, which is the appropriate thing to do. Having said that, all of our securities were performing as of last report, which not many of our peers can say either. If the world falls off a cliff as it tried to do in October, we will all be impacted and there’s no question that there will be negative impacts in our portfolio. However, if the economy stabilizes or improves from here, we have positioned ourselves to benefit, because over 85% of the portfolio is generated during the credit dislocation. In the public entity, we do not have a substantial amount of legacy assets. We were able to capture high risk adjusted returns, which is reflective both through above normal pricing and in the fact that 100% of our debt is secured; 40% first lien, 60% second lien. Our first lien assets are priced at second lien rates. Therefore, when this market turns and it will turn eventually, we will benefit by having a very high yielding portfolio, of about 16% weighted average yield as compared to our peers at 10-12%. We also have exit fees, and equity upside and strong protections and non-call provisions that are going to benefit us in the up cycle. But when the up cycle happens? I wish I knew.”
CEOCFO: In closing, why should investors pick Fifth Street Finance Corp. out of the crowd?
Mr.
Tannenbaum:
“From a safety standpoint, Fifth Street Finance Corp. is unique, as it is
one of the only unlevered players; right now we have no leverage. For an
investor base that is worried about leverage, we are going to stay lightly
leveraged through this period. We have a $50 million credit line that is
currently undrawn. Having a portfolio of $300 million of first and second
lien assets and only a $50 million credit line is lightly leveraged. We are
the only BDC I know of that is increasing their dividends
quarter-over-quarter. The most important reason you should invest in Fifth
Street Finance Corp. is because of our integrity and transparency. We’ve
been in operation for ten years. We weren’t just created in the public
markets. We have a long-standing reputation with a number of institutions
and top decile performance for the last ten years. I personally own about 5%
of our company. I think that alliance of interest with our shareholders is
critical in terms of trust. Therefore, in this environment where you really
want a trusted partner and I mean that in terms of our private equity
sponsors, but also in terms of our shareholder base, Fifth Street is it.” |
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“We currently sit on over 40 boards of directors of small and mid-sized companies. We have worked closely with our clients and private equity sponsors in developing their business, fund raising and growth plans, etc. These partnerships have taken years to develop and we are very proud of the accomplishments that our clients have achieved.” - Leonard M. Tannenbaum |
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