What happened
Shares of business development company Triangle Capital Corp. (NYSE: TCAP) are moving higher today, rising about 11% as of 1:30 p.m. EDT. The BDC announced two deals to sell its investment portfolio and transfer management of the company in two transactions.
The deals value Triangle Capital at about $14.48 per share, or $13.80 per share net of estimated deal expenses, a slight premium to its last-reported book value of $13.43 per share.
So what
It's important to point out that this isn't a typical buyout. Shareholders will only receive about $1.78 per share in cash. The majority of the value comes from shares in the surviving publicly traded BDC that Triangle shareholders will own after closing.
Image source: Getty Images.
Here's how the deal will work: Triangle Capital will sell the entirety of its investment portfolio to funds managed by Benefit Street Partners for $981.2 million. Then, Barings will chip in another $85 million of value through a cash payment to Triangle Capital shareholders to become the BDC's external manager.
|
Sources of Value |
Value per TCAP Share |
|---|---|
|
Barings' cash payment to TCAP shareholders |
$1.78 |
|
Surviving BDC assets, net of expenses |
$12.02 |
|
Total value net of expenses |
$13.80 |
Data source: Triangle Capital presentation, author calculations.
When these two transactions are complete, Triangle Capital's shareholders will have $1.78 in cash from Barings and will own shares of the surviving BDC, which will have about $12.02 of cash per share on its balance sheet.
Barings will immediately invest the cash into a liquid debt portfolio, and rotate it into higher-yielding private senior debt within a two-year period, ultimately targeting a dividend yield of about 8% per year, according to the presentation.
Now what
Ultimately, whether this deal is good for Triangle Capital's shareholders depends on the long-term success of the BDC after Barings takes over as its manager.
Notably, Barings will manage the surviving BDC with a fee agreement that will rank it as one of the best in the industry. When the full fee goes into effect in 2020, Barings will collect a below-average management fee (as far as BDCs go) with a better-than-average incentive fee for good performance.
|
Fee/Year |
2018 |
2019 |
2020 |
|---|---|---|---|
|
Management fee |
1% of assets |
1.125% of assets |
1.375% of assets |
|
Incentive fee |
N/A |
N/A |
20% of returns in excess of 8%, with a 3-year lookback |
Data source: Triangle Capital presentation.
Barings will invest $100 million of its own capital directly into the company at closing and purchase an additional $50 million of stock through tender offers at prices up to net asset value after closing, to further align its interests with outside shareholders.
For what it's worth, Barings and its predecessors have a long history of making investments in private companies. Closed-end fund (CEF) investors may recognize it as the manager of Barings Corporate Investors (MCI 0.42%) and Barings Participation Investors (MPV 0.45%), public funds that have returned 13.5% and 12.4% annualized, net of fees, over the most recent 25-year period, respectively, while using substantially less leverage than the typical BDC all along the way.
Triangle wants to have the proxy put together later this month, put it up for shareholder vote, and ultimately close as soon as June or July 2018 if everything goes to plan. We'll have to see if this deal wins the support of potential activists and other interested buyers, who piled into Triangle Capital after it announced its intention to sell out last year.