Its IPO filing with the Securities and Exchange Commission provides a glimpse of Fifth Street Capital’s deal flow. The document breaks down by quarter how many deals the firm’s lending team reviewed, how many of those deals it provided term sheets for, and how many of those deals got done by financial sponsor clients.
As the credit crunch struck in the third quarter of 2007, Fifth Street Capital reviewed a greater volume of deals than during any other three-month period in the year: $1.5 billion in Q3 vs. $1.3 billion in Q2 vs. $994.6 million in Q1, according to its IPO filing with the Securities and Exchange Commission. Still, so far this year Fifth Street Capital closed on the biggest pile of debt in the first three months of 2007—$67.7 million in debt commitments in Q1 vs. $39.2 million in Q2 vs. $53.9 million in Q3, according to the SEC filing.
With the debt market still uncertain, several LBO pros have predicted that mezzanine lenders could be entering something of a “golden age” after seeing their market share snapped up by hedge funds and other second-lien lenders. Now that the second-lien market has largely fizzled and sponsors seek ways to reduce their equity commitments, mezzanine lenders expect to come back into vogue.
With the IPO, Fifth Street Capital, based in White Plains, N.Y., plans to become a publicly traded business development company. The firm is looking to raise $150 million in the offering.
The firm telegraphed its IPO plans to its limited partners back in the spring as it was heading out to raise what would turn out to be its third and last institutional pool, a mezzanine fund that had a $400 million target. Fifth Street Capital told LPs that their partnership interests would be converted to shares in the new public company. Through Sept. 30, Fifth Street Capital had collected commitments of $165 million for the fund, according to a regulatory filing.
That would appear to represent subdued progress, but the firm’s president, Leonard Tennenbaum, noted back in the spring that it wasn’t easy selling LPs on the idea of a private-limited-partnership-to-public-BDC-conversion. “Once it clicks, they realize how great it is for them and for us,” Tennenbaum told Buyouts in April. “But it has to click.”
The filing was made under the name Fifth Street Finance Corp. Goldman Sachs and UBS are the lead underwriters, joined by Wachovia Securities and BMO Capital Markets. The SEC filing did not list an IPO date.
BDCs are publicly traded vehicles that must pay out a high portion of their income as dividends to shareholders. Fifth Street Capital plans to pay a quarterly dividend and return at least 98 percent of its income to shareholders, according to its SEC filing.
More than a dozen buyout firms, including The
Fifth Street Capital’s management is ostensibly not looking to cash out with the IPO. According to the SEC filing, the firm expects to use “substantially all of the net proceeds from this offering to make investments in small and mid-sized companies.” The firm plans to take between six and nine months to deploy the capital raised in the IPO, according to the regulatory filing.
Fifth Street Capital invests alongside sponsors in companies generating between $25 million and $250 million in revenue.