What happened?
This story is the gift that keeps giving in the BDC industry. After launching an unsuccessful campaign to acquire TICC Capital (NASDAQ: TICC), TPG Specialty Lending (NYSE: TSLX) has chosen the nuclear option: a new campaign to add a member to the TICC board of directors and to replace TICC's external manager at the 2016 annual meeting.
Does it matter?
Absolutely.
A business development company is only as good as its management team. These businesses are truly "jockey plays," where it's all about picking a jockey to manage the portfolio in a way that delivers the best returns for shareholders.
TPG Specialty Lending asserts that TICC Capital has failed its investors, delivering a total return of 27% compared to 188.8% for a composite index of BDC investments since TICC's initial public offering in late 2003. Underperformance is the primary reason TICC Capital trades at one of the largest discounts to book value in the BDC universe, currently trading at 0.65 times its last reported book value per share.
Previously, TICC Capital's external manager campaigned to have its shareholders approve a transfer of management to Benefit Street Partners. That deal would have resulted in a change of management, and a payout for the TICC Capital team estimated to be as much as $60 million. Shareholders, TPG Specialty included, opposed the idea that the manager should receive something of a "golden parachute" for handing over the reins after years of poor performance.
How shareholders voted on a proposal to install Benefit Street Partners as manager:
|
For |
Against |
Abstentions |
|
54% |
40% |
6% |
Data source: SEC filings. TICC Capital needed 67% of the votes present at the meeting for the proposal to be approved.
As the business development industry broadly trades at a discount to book value, campaigns to toss out management teams are becoming increasingly common. A company by the name of RiverNorth is currently attempting to toss out the manager of Fifth Street Finance, which has similarly underperformed its peers.
Whether or not shareholders rally behind activist pressure remains to be seen. This is new territory for a relatively new industry. But given the poor performance at TICC, perhaps it's time for a new jockey.
