Though business development companies are performing well in 2023 relative to the prior two years, mergers among companies with shared managers that help reduce costs amid historic underperformance are still on the table.
Over the past few years, large asset managers such as BlackRock Inc. (BLK), Oaktree Capital Management LP and KKR & Co. (KKR) have elected to combine affiliated BDCs, which they set up to invest in middle market companies. Others on the smaller end of the spectrum have also been affected including those managed by firms such as New York-based Benefit Street Partners LLC and Boston-based First Eagle.
“The industry has done fairly well in the last two quarters because their return on equities have come up,” said Mitchell Penn, senior analyst at Oppenheimer & Co.
Despite that, the industry hasn’t fully recovered after a tumultuous two years sparked from Fed rate hikes that widened the gap between private middle market loans and Fed paper. After the Fed embarked on an interest rate hike spree, business development companies being marked to market each quarter had to adjust.
“Business development companies had to mark down their loan portfolios due to the widening credit spreads in 2020, which sit at about 96% of the cost today,” Penn said.
Consequently, a wave of consolidation hit the industry with several BDCs, particularly those with the same advisers, merging. In many cases, they said the deals would lower base management fees and add scale with a larger funnel to fit their investment strategy.
Bundling BDC Fees
On Oct. 6, for instance, Franklin BSP Capital Corp. (FBCC) and Franklin BSP Lending Corp. (FBLC), a pair of middle market-focused BDCs managed by Benefit Street, agreed to merge. The deal followed a Sept. 6 deal in which BlackRock merged Santa Monica, Calif.-based BlackRock TCP Capital Corp. (TCPC), its externally managed specialty finance company focused on middle market lending, and New York-based BlackRock Capital Investment Corp. (BKCC), providing flexible financing solutions to middle market companies.
BlackRock lowered their base management fee to 1.25% from 1.5% on certain assets and will cover 50% of the merger costs for the entities (up to $6 million, conditional to the closing of the transaction by the first quarter of 2024). The combined entity will operate through a single accounting team, gaining efficiencies for their filings, Penn said.
Benefit Street, meanwhile, said the Franklin merger would eliminated “duplicative operating expenses such as legal, audit, regulatory and administrative costs” at the lower middle market BDCs.
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