The struggling business development company (BDC) Triangle Capital Corporation (NYSE: TCAP) is up for sale. It may not have to look very hard for a buyer, as at least one BDC, TPG Specialty Lending (NYSE:TSLX), made clear its interest in buying it.
In fact, TPG's BDC already bought a little bit of its peer, purchasing about 3% of Triangle Capital's outstanding stock in the fourth quarter -- the maximum allowed by law.
On its fourth-quarter conference call, TPG Specialty Lending's CEO, Josh Easterly, said in prepared remarks that its investment was "a commercial one," as it believes the "outcome of TCAP's strategic review will likely drive TCAP's stock price closer to net asset value or result in a value-enhancing transaction, both of which would benefit TSLX's position and therefore our shareholders."
TPG Specialty purchased its Triangle shares for about 73% of last-reported book value, so it would stand to collect a quick gain if Triangle was liquidated for anything near what it purports its portfolio is worth. But as much as TPG Specialty is an opportunistic investor willing to go to anywhere for higher returns, it appears there's more here than just making a quick buck on a relatively trivial portfolio position.
TPG Specialty Lending is no stranger to making a play at other business development companies trading at depressed prices, even if it means doing so aggressively. In 2015, it fired shots at TICC Capital (NASDAQ: TICC), offering to purchase the BDC outright at a price equal to 90% of its book value. TICC Capital wanted nothing to do with it, however, since, unlike other offers, it didn't come with a big payday for management. TICC's manager ultimately decided to stay in place; no deal.
The bid for TICC was interesting, if even a little controversial. Arguably, the only winner was the U.S. Post Office, which delivered piles of letters, written by all sides, trying to convince TICC shareholders that one choice was clearly better than another. It was the best drama the industry has seen since Allied Capital was sold to Ares Capital (NASDAQ:ARCC) in 2010.
Even after its failed activist effort at TICC, TPG Specialty was clear on its conference call that it wasn't ruling out activism with Triangle Capital. It declined to participate in Triangle's sales process because of what it said were "onerous and non-customary provisions and a non-disclosure agreement that would have resulted in relinquishing our voice as TCAP['s] fifth-largest shareholder."
In other words, TPG Specialty could have taken a closer look at Triangle Capital's books, but only by giving up its ability to influence the outcome and its ability to sell its stake in Triangle if it wanted to do so. The optionality value of going activist later seemingly has more value, in TPG Specialty's eyes, than getting involved in the process right now.
Who's in the trenches?
Thanks to an obscure law, TPG Specialty Lending can't own more than 3% of another BDC, but its friends who use other structures certainly can. On its conference call, Easterly repeatedly mentioned the fact that it is Triangle's "fifth-largest shareholder" and that other investors own more of Triangle than it does, which I took as a hint to go look a little more closely at who also owns a sizable stake in Triangle Capital.
Based on regulatory filings compiled by WhaleWisdom.com, it's notable that a New Jersey pension fund is Triangle's largest owner, a stake it increased in the most recent quarter. That same pension fund is also a major shareholder in TPG Specialty Lending, and has been for a long time.
Other familiar names are in on Triangle, too. Ironsides Partners, which took a run at Fifth Street Senior Floating Rate in an activist campaign, is listed as a new investor. Likewise, RiverNorth, which engaged in its first-ever campaign against Fifth Street Finance in 2015, appears as a new owner as of the end of the fourth quarter.
The external manager of Ares Capital Corporation, Ares Management, also owns roughly 2% of Triangle, though I suspect that is related to a BDC fund it manages on the side. (Ares is still very busy working through its acquisition of American Capital, which closed early in 2017.)
Establishing a floor
TPG Specialty has a reputation as one of the most shareholder-friendly BDCs, given it's one of the very few that rarely raise more capital by issuing stock, even as the equity markets are almost always open to it.
Easterly explained how it might approach a deal to acquire Triangle, given its preference for keeping its BDC at the same size it is today on its conference call:
If you could do it in a very value-oriented way, where it would be very accretive to TSLX shareholders and we could provide a solution to TCAP shareholders, would we want to do that? Yes. Ultimately what that would mean [is that] we rotate the book and return capital to shareholders upon realizing a discount. We would not be a buyer of TCAP above net asset value, because that would give us -- would not allow us the ability to return capital to shareholders if we couldn't reinvest in a very accretive way.
My take? TPG Specialty Lending knows it doesn't need to barrel into the situation as it did with TICC Capital. But it will act as a shot clock of sorts, as it's now on the record as having an interest in Triangle Capital, albeit at some price less than book value.
Few BDCs have the credibility to say that they would buy a BDC, liquidate it, and return the capital to shareholders if they can't reinvest the money on attractive terms. TPG Specialty Lending can say that -- and I actually believe it -- because it has a multi-year record of turning down money to manage, not looking for any and all capital it can gets its hands on.
If Triangle Capital's "strategic review" goes on a little too long, or its share price doesn't bridge the gap with its book value (last reported at $13.20 per share), its shareholders know who to call to speed things up.