This is incredible.
Asset management is one of the best businesses in the world. Asset managers make money by making big bets with other people's money. And within the industry, the best kind of managers are the kind who manage "permanent capital," money that cannot be withdrawn.
The market rewards the managers of permanent capital with huge earnings multiples because, theoretically, the fee stream should continue in perpetuity. It's analogous to having a highly paid job where, no matter how poorly you perform, you can never be fired.
That's why the TICC Capital (NASDAQ: TICC) situation is so interesting right now. The management team is making a mint managing a pile of permanent assets; but with investors dissatisfied, the current managers are looking for a way out.
What's up with TICC?
TICC Capital cut its teeth as a public company by investing in highly leveraged, but high-yielding, collateralized loan obligations. It worked well for a time. The company ended up collecting more than $1 billion of assets under management thanks to routine stock offerings and a little bit of leverage. It worked even better for the asset manager, which earned nearly $23 million in fees for running the company in 2014. And shareholders certainly enjoy the double-digit dividend yield.
But times have changed. Investors aren't willing to pay up for BDCs that invest in CLOs any more, and TICC, being one of the biggest CLO investors, was one of the worst losers. Its share price has fallen 31% in the last year, and it now trades at a 21% discount to book value.
Rather than change directions with its current management team, the company decided to sell the asset manager to Benefit Street Partners. Benefit Street Partners is a unit of Providence Equity Partners, a private equity firm. The idea is that the new manager would be better able to invest in the kind of stuff that BDCs like TICC Capital typically invest in -- debt and equity in private businesses. Changing the portfolio should help its shares trade higher.
That announcement came on August 4. It was basically a done deal. Benefit Street Partners would take over and run the company, and not much else would change. But then NexPoint Advisors, another asset manager, threw its hat in the ring, suggesting it would be a better manager of the company.
NexPoint Advisors submitted a compelling proposal. According to the press release, NexPoint suggested it would:
- Cut management fees by 50% during the first three years.
- Waive the first $5 million of management fees.
- Eat its own cooking by investing $10 million into TICC Capital's common stock.
Taken at face value, this is a substantially better offer. Benefit Street Partners merely offered to take over the portfolio and manage it under the current fee agreement. NexPoint is willing to work for less than half the price for at least the first three years.
What's the endgame?
Truthfully, it's hard to say. For one, Providence Equity Partners is a sizable private equity firm. It sees more than enough deal flow to run a $1 billion BDC like TICC Capital. In fact, it already manages one, albeit a small, private BDC with less than $5 million in assets named Griffin-Benefit Street Partners.
Providence has had its share of bad luck recently. A New York Times article was less than forgiving about some of its recent strikeouts. However, it does have the capacity to make TICC a plain-vanilla BDC that invests primarily in private company debt, given that TICC is a fraction of the size of its largest private equity fund.
On the other hand, NexPoint is also in the credit business. Affiliated with Highland Capital Management, it manages $22 billion in assets, of which a very small portion (about $21 million) is invested in a private BDC called NexPoint Capital.
From its press release, which highlights the firm's CLO experience, it seems that NexPoint wouldn't fundamentally change the company's portfolio, and continue to invest in CLOs. My take is that NexPoint sees a lower fee, not a complete shift in its strategy, as the simplest way to drive shares higher.
It's possible that NexPoint ignited a bidding war for the assets, which would be excellent. Either way this goes, though, the shareholders will likely win as a new and energized management team takes the helm from a company that is currently managed by a company that wants nothing to do with it.
