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Analysts skeptical of Fifth Street Finance's decision to amend investment advisory agreement

Written by Jasir Jawaid

Fifth Street Finance Corp. has proposed an amendment to its investment advisory agreement with Fifth Street Asset Management to reduce management fees on prospective equity capital raises, CEO Todd Owens said during a May 11 earnings call.

Under the proposed framework, all investors, whether new or existing, would share equally in the benefit of the fee reduction regardless of when they invested. Owens said the company is working through the details of the amendment and expects to provide additional information with final details before the end of the June quarter.

The move is part of the company's strategic review aimed at producing a strong and sustainable performance for shareholders. By reducing fees, Fifth Street Finance creates "operating leverage" that will allow shareholders to benefit from economies of scale as the company grows, Owens said.

But the news drew sharp criticism from some of the listeners on the call.

Arguing that the amended agreement would benefit shareholders is like a company saying it will repurchase stock but never does, KBW's Troy Ward said. To Casey Alexander of Gilford Securities, the news seemed "at least in part some admission that past raises haven't been as successful for shareholders as it has been for the management company."

In response, Owens reiterated that the proposed amendment is focused on improving operating leverage if and when the company is in a position to raise capital.

"We think going forward from the scale that we are at today, it makes a lot of sense prospectively to have a lower fee structure," he said.

This article was published by S&P Global Market Intelligence on the S&P Capital IQ Pro platform.


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