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Howard Marks' Oaktree Buys Into Small Businesses Through Fifth Street Finance Stake

- By Holly LaFon

Two weeks after Oaktree Capital, a $100 billion global investment manager founded by Howard Marks (Trades, Portfolio), announced it would become investment adviser to two business development companies, Fifth Street Finance Corp. (FSC) and Fifth Street Senior Floating Rate Corp. (FSFR), it disclosed Monday it also bought a stake in one of them.


Similar to venture capital firms, business development companies like Fifth Street Finance invest in and help grow small and medium-sized businesses, particularly those in financial distress. The aims of the entities integrate with Oaktree's credit and value-driven specializations. Together, Oaktree's new business development companies will manage around $2.5 billion in assets.

Oaktree purchased 19.2%, or 27,044,419 shares of Fifth Street Finance Corp., according to a filing. At the close of the deal, slated for the fourth quarter, Oaktree expects to pay Fifth Street Management $320 million.

"We are excited about the opportunity to serve as the investment adviser for FSC and FSFR," Jay Wintrob, CEO of Chief Executive Officer of Oaktree, said July 14.

"These BDCs are a clear strategic fit with Oaktree's direct lending expertise, and the completion of this transaction will create a BDC platform with scale that leverages our deep credit expertise, loan origination capabilities and underwriting skills. Importantly, Oaktree has the investment experience and acumen to manage these portfolios effectively and to pursue new investment opportunities to maximize value for BDC investors over time."

Business development companies also allow public investors to trade in debt and equity of private companies. A rule requiring the entities to pay out 90% of their earnings means they often offer sizable dividends. Fifth Street Finance reported losses in 2016 and over the trailing-12 months, and cut its monthly dividend to 2 cents in March from 6 cents in February. It has increased the dividend to 12.5 cents for September. As of Monday, the company has an 8.51% trailing dividend yield.

Marks' Oaktree is taking leadership of Fifth Street Finance after it experienced two years of falling revenue, following steady growth since 2008. The company ended the first quarter with $84.6 million in cash and $887.6 million in long-term debt. In 2016, it generated cash flow of $164.8 million.

Fifth Street Finance's stock has trailed down 2.55% over the past year and 46.92% over the past five years. On Monday, the price declined 2.2% to $5.34 per share.

At the close of the transaction, Fifth Street Finance will change its name to Oaktree Specialty Lending Corporation and trade with the stock symbol OCSL. Fifth Street Senior Floating Rate will change to Oaktree Strategic Income Corporation, under the ticker symbol OCSI.

See Oaktree's long stock portfolio here.

This article first appeared on GuruFocus.