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NewStar Financial to Acquire Fifth Street Asset Management’s Middle-Market CLO Business

July 07, 2017, 07:38 AM
Filed Under: Mergers & Acquisitions

Fifth Street Asset Management Inc. announced that it has agreed to sell Fifth Street CLO Management LLC, a wholly-owned subsidiary of Fifth Street Holdings L.P., to NewStar Financial, Inc.  FSAM intends to use the proceeds from this transaction to pay down its credit facility and for general corporate purposes.  The estimated purchase price is approximately $16 million, net of $13 million of assumed indebtedness, and will be subject to adjustment up or down based on certain working capital items as of closing.  The transaction is expected to close in the third quarter, subject to certain investor consents and closing conditions set forth in the purchase agreement between Fifth Street Holdings L.P. and NewStar.

FSCM was formed in 2015 to manage Fifth Street’s middle market CLO business. The company currently manages two CLOs, with approximately $726 million of assets under management as of March 31, 2017, backed by middle market loans, and holds certain interests in its sponsored CLOs primarily to comply with regulatory risk retention requirements.

“Over the course of FSAM’s strategic review, it became clear to us that given the market environment and headwinds we faced over the past year and a half, it would be difficult to scale our CLO business,” said Leonard M. Tannenbaum, Chief Executive Officer of FSAM.  “We believe that exiting this business line is in the best interest of our shareholders and is an important step as we continue to enhance our liquidity position and streamline operations.”

Over the past eighteen months, NewStar has focused on expanding its asset management platform by launching new managed funds, acquiring investment management platforms and increasing its investment activity.  This transaction is the Company’s second acquisition adding to its managed assets and represents another important step in that strategy.  The acquisition is highly complementary to the Company’s existing middle market direct lending business and provides balance to its overall asset management platform, increasing pro forma fee-paying AUM to $4 billion, split evenly between its middle market and liquid credit strategies platforms. The transaction also adds significantly to the Company’s lending capacity, allowing it to better meet the needs of its private equity clients and compete more effectively to lead new direct lending opportunities.

FSCM will become a wholly-owned subsidiary of NewStar and the funds will be managed by NewStar’s middle market investment team.  The transaction is expected to add more than $2.5 million to the Company’s run-rate fee revenue and will serve as a further catalyst to the growth of NewStar’s asset management activities.

"This acquisition is consistent with our strategy to expand our asset management activities in ways that add to our value proposition for institutional investors and leverage our core strengths in direct lending, securitization and credit management. This transaction also provides an attractive way to diversify our business mix, adding to fee revenue and accelerating improvement in equity returns," said NewStar’s Chairman and Chief Executive Officer Tim Conway.

“The transaction is expected to be accretive to earnings in 2017, adding predictable fee revenue derived from long-term CLO management contracts” added John Bray, NewStar’s Chief Financial Officer.  “We were able to complete thorough due diligence and the terms of the transaction worked well for all parties.”

Seward & Kissel LLP served as legal counsel and GreensLedge Capital Markets LLC advised NewStar on the transaction. Natixis Securities Americas LLC served as financial advisor to FSAM and Dechert LLP served as its legal counsel.

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