Fifth Street Finance Corp: A Look at a BDC’s History

Fifth Street Finance Corp (FSC) was a publicly traded business development company (BDC) that primarily focused on providing financing solutions to small and mid-sized companies. BDCs like Fifth Street Finance were designed to make capital available to companies that often struggle to access traditional bank loans. Their investment strategy generally involved a mix of debt and equity investments, aiming to generate both current income and capital appreciation.

The company’s investment portfolio consisted largely of first lien senior secured debt, second lien secured debt, and subordinated debt. These investments were often accompanied by warrants or equity positions, giving FSC the potential to participate in the upside of the companies it invested in. Sectors Fifth Street Finance targeted included business services, healthcare, manufacturing, and retail.

For years, Fifth Street Finance operated under the leadership of its founder and CEO, Leonard Tannenbaum. The company experienced periods of significant growth, deploying capital into a variety of businesses across different industries. However, Fifth Street Finance also faced criticism regarding its performance and management practices. Specifically, concerns were raised about its relatively high operating expenses compared to its peers in the BDC sector. These expenses, coupled with investment losses, contributed to a decline in its net asset value (NAV) per share and a decrease in its stock price over time.

One of the key challenges Fifth Street Finance faced was maintaining a consistent and high-quality portfolio. The inherent risk involved in lending to smaller, less established companies meant that loan defaults and restructurings were not uncommon. Managing these credit risks effectively was crucial for the company’s long-term success.

In 2017, a significant change occurred when Oaktree Capital Management acquired Fifth Street Asset Management, the external manager of Fifth Street Finance. This marked a strategic shift for the BDC, with Oaktree bringing its expertise in credit investing to bear on the management of the portfolio. Subsequently, Fifth Street Finance was renamed Oaktree Specialty Lending Corporation (OCSL). This rebranding and change in management signaled an effort to improve the company’s performance and address past shortcomings.

The transition to Oaktree Specialty Lending Corporation involved a repositioning of the investment portfolio and a focus on higher-quality assets. While the legacy of Fifth Street Finance involved challenges and periods of underperformance, its story highlights the complexities and risks inherent in the BDC sector, as well as the potential for change and improvement under new management. Today, Oaktree Specialty Lending Corporation continues to operate as a BDC, building upon the foundation laid by its predecessor while seeking to deliver value to its shareholders under the Oaktree banner.