Fifth Street lends to private small and mid-sized companies most often in connection with investments by private equity sponsors. Under certain circumstances, we may also commit equity. Our sponsors bring us a variety of opportunities, but they often share some key traits.
Typically, a private equity firm (or sponsor) finds a company it would like to buy. Sometimes the company isn't performing up to its potential. Other times, the sponsor sees value that others have yet to recognize.
Either way, the goal of the private equity firm is to improve the company so it can eventually sell for a higher price. This way, the sponsor and its investors earn strong returns on their investment. Improving the company might involve a change in strategy, expanding into a new market or even bringing in new management.
After determining the company's current value, the private equity firm decides on a purchase price, which it seeks to fund through a combination of debt and equity. The sponsor provides the equity, which Fifth Street typically complements with some or all of the debt. In select cases, Fifth Street may also invest in a relatively small amount of equity. In exchange, Fifth Street can earn income from interest and can also earn income from capital gains, in the event an equity investment appreciates in value.
Fifth Street: Where Partnership Meets
Our private equity sponsors have expertise assessing a company's financial and operational health. We believe having this extra layer of oversight from our sponsors helps Fifth Street ensure that potential returns from each investment are appropriate given the risk. Partnering with a private equity firm may also lower default risk because sponsors typically remain committed to their companies financially, even through difficult times.
Once the deal has closed, we make managerial assistance available in an effort to work with the sponsor and company to try to nurture the growth of the business. This close working relationship can also help us spot challenges early—especially those that may impact the company's ability to repay the loan.