Updated: Jan 23, 2017 @ 11:40 am

Below is a chart of net realized gains or losses recorded by Fifth Street Finance in every fiscal year since IPO.

Fifth Street Finance’s Underwriting Performance

With only two years of realized gains in excess of losses, Fifth Street’s underwriting record puts it squarely in the bottom tier. Note that Fifth Street Finance went public after the 2008 Financial Crisis, and thus these net losses developed over a period of broad economic expansion.

  • Large losses in 2012 were the result of poor performance of portfolio companies that had been part of its book since IPO. Losers included Premier Trailer Leasing, Best Vinyl Fence & Deck, Traffic Control & Safety, and O’Currance. FSC noted in its filing that the realized losses were due to the realization of losses previously recorded as unrealized losses. Fifth Street Finance was sitting on its losers for far too long.
  • Impressively, FSC managed to show a record amount of realized losses in 2016 despite having minimal investments in troubled industries such as Oil & Gas exploration companies. In fiscal 2016, it recorded losses on long-time underperformers that included Ameritox, JTC Education, CCCG, and Phoenix Brands Merger Sub.

Net realized gains or losses measure investment performance on investments that have been sold, written off as a permanent loss, or repaid. This shows us a BDC’s underwriting record based on investments that have come to a close. Many observers look at net realized gains or losses because it doesn’t include unrealized gains that may be the result of aggressive accounting maneuvers.

Over time, the very best BDCs will report gains in excess of losses, due to the fact that their winners produce more gains than their losers do losses. Net realized losses = Realized gains + realized losses.

With only two years of realized gains in excess of losses, Fifth Street’s underwriting record puts it squarely in the bottom tier. Note that Fifth Street Finance went public after the 2008 Financial Crisis, and thus these net losses developed over a period of broad economic expansion.