Fifth Street Finance is a high-yield business development company (BDC)Learn more about Fifth Street Finance (FSC), a BDC that trades on the NASDAQ exchange.

Important information:

  1. Historical NAV per share
  2. Historical NII per share
  3. Historical share repurchases (buybacks)
  4. Historical underwriting performance
  5. Meet Fifth Street’s management and Board of Directors

Fifth Street Finance History

  • 1998 — Starting with family money. Len Tannenbaum, the founder of Fifth Street Asset Management and its BDCs, got his start managing family money. At 27 years old, Tannenbaum had convinced his then father-in-law, Bruce Toll, to fund his start-up hedge fund that would invest in small businesses. Toll had an important role in the launch of Fifth Street, eventually committing over $100 million of capital to the company.
  • 1999 and early years — A mixed record of performance. Some of Tannenbaum’s investments were big winners. Some, big losers. One of its worst and earliest losses was the result of a $3 million acquisition of CollectingNation.com, a website dedicated to Beanie Babies. Ty, the Beanie Baby maker, retired the plush toys in 1999, the same year Tannenbaum’s fund bought control of CollectingNation. One winner: New World Restaurants Group, a company in which hedge fund manager David Einhorn was also an investor. Tannenbaum and Einhorn became friends from the shared business deal.
  • 2007 to 2008 IPO — Fifth Street launches Fifth Street Mezzanine Partners III, L.P. in 2007, which would become Fifth Street Finance (FSC). Fund documents tell the story. Toll and Einhorn were major investors in the fund. Toll was also a member of the board of directors, a guarantor of $50 million of Fifth Street’s debt, and the owner of $15 million of preferred stock in the company. The IPO documents also reveal some of Fifth Street’s inexperience. It listed that the investment adviser (Fifth Street) had no prior experience managing a BDC or a RIC. In addition, it cited problems with its auditors. “Our independent registered public accounting firm has identified material weaknesses in our internal control over financial reporting.” The fund would collect a typical 2-and-20 management fee, with the managers collecting 20% of returns when FSC earned an annual return of more than 8% on its equity, subject to a catch up.
  • 2008 — The IPO details. The N-2 filing shows that Fifth Street Finance (FSC) expected to sell shares at $14.62 at the mid-point of its offering range, pay about $0.32 per share in underwriting expenses, and begin trading with a net asset value of about $13.80 per share. Prior to the IPO, Fifth Street Finance had investments in 19 portfolio companies, which had a weighted-average yield of 16.7%. Its portfolio included stakes in Boot Barn (which is now public, trading under the ticker BOOT), in addition to truly small companies like Goldco (an operator of 59 Burger King franchises) and a telemarketer by the name of O’Currance Teleservices, which was already underperforming at the time of the IPO. Fifth Street Finance ultimately sold 10 million shares in its IPO at $14.12 per share, the bottom of its offering range.
  • 2009 — Losses pile up, and Fifth Street grows dilutively. Almost immediately, Fifth Street Finance began to incur sizable losses on its investment portfolio. Just one year after IPO, two of its original 19 investments had generated realized losses. Toll wasn’t appearing at board meetings, and he did not stand for re-election. He wouldn’t be Tannenbaum’s father-in-law much longer. Tannenbaum separated from his wife in 2009. The company wrote positively to its investors in January 2009, going so far to say that “we will not join many of the other BDCs in requesting approval to sell shares below book value,” an implicit confirmation that Fifth Street was holding up far better than other BDCs during the downturn. Alas, it asked for the right to sell shares below book value in June of 2009, which was approved by shareholders. Almost immediately, it issued millions of shares, resulting in a $1.21 hit to NAV as a direct result. See the chart of Fifth Street Finance’s NAV per share, and the decline quick decline in calendar 3Q.
  • 2010-2013 — The growth years. Fifth Street Finance grew rapidly after the market graced it with a share price in excess of book value. From the beginning of fiscal 2010 to the end of fiscal 2013, total investments at fair value grew more than 500%. Poor underwriting took its toll, however, as its net asset value continuously declined on a per-share basis. Its net realized losses grew in every fiscal year from 2009 to 2012. Net realized losses improved in 2013, but were still negative. It was becoming very clear from its financial statements that Fifth Street Finance was not a particularly capable underwriter.
  • 2015 — An activist appears. Closed-end fund investment company RiverNorth acquired 6% of FSC’s outstanding stock took aim at Fifth Street Finance’s poor underwriting record and historical performance. It laid the case for firing its external manager, and replacing it with a new one.
  • 2016 — Fifth Street and greenmail. In an effort to maintain its valuable management contract with FSC, Fifth Street Asset Management and Tannenbaum ultimately agreed to buy out RiverNorth’s investment. RiverNorth was handsomely rewarded, bought out at a 30% premium to the then-current market price (but a much smaller premium to the price at which it bought FSC shares), and received a warrant that entitled it to purchase shares of FSC’s external manager, Fifth Street Asset Management. RiverNorth, which called for the ouster of Fifth Street Finance’s management, now had an economic interest in ensuring the management was not replaced.
  • 2016 — SEC Enforcement comes knocking. On March 23, 2016, the Division of Enforcement of the SEC sent subpoenas and document-preservation notices to FSC and related entities. The SEC is investigating (1) how the company values its portfolio companies and investments, (2) the expenses that were charged to Fifth Street Finance, (3) trading in BDCs by Fifth Street’s hedge funds, (4) statements made to the board and investors about the fair value of its investments and the fees charged to investors, (5) its policies and procedures, (6) statements and potential omissions in SEC filings, (7) the entities’ financials and records and whether they fairly and accurately reflect transactions, and (8) several other issues relating to the company’s books and records.