Fifth Street Finance Tannenbaum

Fifth Street Finance, now known as OCS Capital, was a business development company (BDC) that operated under the ticker symbol FSC for many years. It became particularly associated with Leonard Tannenbaum, its chairman and CEO, who played a pivotal role in its growth and, ultimately, its decline.

Tannenbaum founded Fifth Street Capital in 1998. The company specialized in providing financing to small and medium-sized businesses, often filling a gap left by traditional banks. Its early success led to the formation of Fifth Street Finance Corp., a publicly traded BDC, in 2008. The BDC structure allowed it to avoid corporate income tax, passing on its earnings directly to shareholders in the form of dividends. For a time, FSC was considered an attractive investment for income-seeking investors.

Under Tannenbaum’s leadership, Fifth Street Finance grew rapidly, increasing its assets under management significantly. This growth was fueled by aggressive origination of loans and a focus on higher-yielding, often riskier, debt. The strategy initially worked, and FSC generated substantial income and paid out attractive dividends. Tannenbaum himself became a prominent figure in the BDC world.

However, the company’s fortunes began to turn as the credit environment tightened and competition intensified. Fifth Street’s portfolio started to show signs of stress, with increasing non-accruals and write-downs. The market began to question the sustainability of its high dividend payouts. Concerns about the quality of its underwriting and the level of risk in its portfolio grew. Consequently, the stock price plummeted.

The situation worsened, leading to a series of restructurings and strategic shifts. Fifth Street attempted to diversify its portfolio and improve its underwriting standards, but these efforts proved largely insufficient. Ultimately, the company faced immense pressure from both investors and regulators.

In 2017, Fifth Street Finance announced a merger with Oaktree Capital Management, a prominent alternative asset manager. The merger marked the end of Fifth Street Finance as an independent entity and effectively removed Leonard Tannenbaum from his leadership role. Oaktree subsequently renamed the company OCS Capital Corp.

The Fifth Street Finance story serves as a cautionary tale about the risks associated with aggressive growth, poor underwriting, and excessive leverage in the BDC sector. While Tannenbaum initially built a successful enterprise, his pursuit of rapid expansion and high yields ultimately led to significant losses for shareholders and the eventual demise of the company he founded. The case also highlights the importance of thorough due diligence and sound risk management in the world of business development companies.