• Firms exchange letters while shareholders prepare for vote
  • Ability to change management is feature of capitalism: TPG

In a quiet corner of finance, a fight is heating up.

TPG, which manages more than $70 billion in alternative assets, is agitating for change at publicly traded lender TICC Capital Corp. The managers of TICC should be fired for subpar performance and the board should include a new director chosen by TPG, which owns 3.2 percent of TICC via a lending vehicle, the firm said in a string of letters ahead of a Sept. 2 shareholder vote.

In the past week, independent proxy advisory firms Glass Lewis & Co., Egan-Jones Ratings Co. and Institutional Shareholder Services Inc. recommended that shareholders vote in favor of both of TPG’s proposals. TICC on Tuesday called those proposals self-serving and said TPG is evaluating its performance using misleading time periods.

The scuffle throws the crop of lenders into a light that many players hope will force the 36-year-old industry to mature.

Known as business development companies, the lending vehicles mostly attract money from individuals seeking current income, which the BDCs pay out in the form of dividends in exchange for avoiding corporate taxation.

“The challenge is TICC and many BDCs don’t have institutional shareholders,” Josh Easterly, a TPG partner who oversees its BDC called TPG Specialty Lending Inc., said in an interview. “We’re trying to clean up the neighborhood. It would be a watershed moment.”

Total Returns

At issue is TICC’s performance. From its 2003 initial public offering to Aug. 4 the company had a 62 percent total return -- including stock price movement and dividends paid. A composite of comparable BDCs had a 254 percent return, while the S&P 500 Index returned 172 percent and U.S. Treasuries 70 percent, according to a TPG presentation.

TICC has said the time period is misleading due to a change of strategy. In 2009, it switched from lending solely to technology companies to a wider swath of debt issuers and started investing in collateralized loan obligations. From that point forward the company’s total return has topped 300 percent, outperforming peers and the S&P 500, according to a TICC presentation.

“Following a period of recent market volatility in the fixed income markets, we have updated and enhanced TICC’s investment strategy to adapt to a changing market and deliver returns for our stockholders,” Steve Novak, the chairman of Greenwich, Connecticut-based TICC, said in an e-mail.

“The strategy is beginning to take hold, as evidenced by our recent record operating results and the significant increase in the book value of our common stock,” he added. TICC has climbed 41 percent to $6.24 since its low this year on Jan. 15. It hit an all-time high of $17.22 in May 2007.

Better Off

The three proxy advisory firms have disagreed with TICC, saying shareholders would be better off with a new group managing the fund’s assets.

One “major risk” of firing management would be a decline in asset values until a new contract is negotiated, Chris Testa, an analyst at National Securities Corp. who’s advocated retaining the existing management contract, said in a report Tuesday.

TPG hasn’t said whether it would attempt to oversee TICC’s assets if shareholders vote to terminate the management agreement.

For the alternative-asset manager, the yearlong fight has been worth the effort, TPG’s Easterly said. If institutions become comfortable investing in the industry -- which has grown as a financing source for mid-sized U.S. companies as traditional bank lenders retrench under new regulations -- all BDCs could benefit.

“The industry has a very good chance of being a solution for the broader economy by providing credit, but only if it can garner institutional support,” Easterly said. “If you can’t fire a management team that’s under-performing, the wheels of capitalism stop turning. It would make the BDC space, to many people, un-investable in the long term.”

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