You might remember the name. Or maybe you just saw it on an old tax return and wondered where that ticker symbol went. Fifth Street Finance Corp (formerly FSC) used to be one of the heavy hitters in the Business Development Company (BDC) world. It was big. It was aggressive. Then, it basically became a textbook case of how things can go sideways when management incentives don't quite align with shareholder interests.
Markets are messy. Finance is even messier.
If you were looking for Fifth Street Finance Corp today on the NYSE, you wouldn't find it. It's gone. Not "bankrupt" gone, but "absorbed and rebranded" gone. Back in 2017, Oaktree Capital Management—a massive player in the distressed debt space—stepped in and took over the management contracts. Eventually, the entity was merged into what we now know as Oaktree Specialty Lending Corp (OCSL).
The Rise and Substantial Fall of FSC
It started with a simple enough premise. BDCs like Fifth Street Finance Corp were designed to provide capital to small and mid-sized businesses that the big banks wouldn't touch. In exchange, they paid out massive dividends. Investors loved it. For a while, Fifth Street was the darling of the yield-chasing crowd. They were lending to everything from healthcare tech companies to manufacturing plants.
The scale was impressive. At its peak, Fifth Street was managing billions. But size is a double-edged sword in the credit world. To keep growing, you have to keep lending. And when you have to keep lending to satisfy a hungry dividend, sometimes you start making deals you probably shouldn't. Credit quality started to slip.
Then came the legal headaches.
Honestly, the SEC wasn't thrilled with how they were doing things. In 2016, the company agreed to pay a $1.65 million fine to settle charges that it had improperly allocated expenses. It wasn't just the fine; it was the signal it sent to the market. Trust is the only real currency in the BDC space, and Fifth Street was running low on it. Shareholders were furious. The stock price was cratering while the management team was still collecting hefty fees based on the total assets under management, rather than the performance of the stock.
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Why the Oaktree Takeover Changed Everything
When Howard Marks and the team at Oaktree moved in, it wasn't a friendly hug. It was a salvage mission.
They saw an undervalued portfolio that was being weighed down by bad optics and even worse management. By taking over the management of Fifth Street Finance Corp and its sister company, Fifth Street Senior Floating Rate Corp (FSFR), Oaktree basically promised to professionalize the whole operation. They slashed the "middle-market" junk and started pivoting toward more senior secured loans.
Why does this matter to you now? Because the "Fifth Street" era serves as a warning. It shows that a high dividend yield is often just a mask for high risk. If a BDC is paying 12% while the rest of the market is at 8%, you aren't getting a bargain. You're getting a hazard pay.
The Problem With External Management
One of the biggest gripes investors had with Fifth Street Finance Corp was the external management structure. In this setup, the people running the fund are a separate company. They get paid a percentage of the total assets.
Think about that for a second.
If you get paid based on how much money you manage, you want to manage as much as possible. You might issue more stock—even if it dilutes current shareholders—just to buy more loans and increase your fee. It creates a "growth at all costs" mentality. This is exactly what critics say happened at Fifth Street. The NAV (Net Asset Value) kept dropping, but the asset base stayed large enough to keep the fees flowing to Fifth Street Asset Management.
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The Shift to Quality (The OCSL Era)
The transition from FSC to OCSL wasn't overnight. It was a long, painful grind. Oaktree had to go through the books and realize losses on loans that were never going to be paid back. They had to clean house.
Today, if you look at the successor, Oaktree Specialty Lending, it’s a completely different animal. They focus on "first lien" debt. Basically, they are first in line to get paid if a company goes bust. Fifth Street used to dabble in a lot of "second lien" or "mezzanine" debt—the stuff that gets wiped out first when a recession hits.
- They diversified the portfolio across dozens of industries.
- They lowered the cost of capital.
- They aligned management fees with shareholder returns (mostly).
- They stopped the bleeding.
It’s a boring strategy compared to the Wild West days of 2014, but in finance, boring is usually where the actual money is made.
Lessons From the Fifth Street Finance Corp Saga
You can't talk about BDCs without talking about the "total return." Most people just look at the dividend check. That’s a mistake. If Fifth Street Finance Corp paid you $1.00 in dividends but the stock price dropped by $2.00, you didn't make money. You lost $1.00 and got taxed on the dollar you "earned."
FSC was a masterclass in the "Value Trap."
It looked cheap on paper. It traded at a massive discount to its Net Asset Value. Value investors kept jumping in, thinking, "It can't go any lower." It did. It went lower because the market correctly guessed that the assets on the books weren't actually worth what the company claimed they were.
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If you are looking at BDCs today, like Ares Capital (ARCC) or Main Street Capital (MAIN), you have to look at their "underwriting track record." How many of their loans go into default? How often do they have to write down the value of their investments? Fifth Street failed because its underwriting was, frankly, not up to par with the big boys.
What Should You Do Now?
If you still hold old records or are looking into the history of high-yield credit, the path forward is about due diligence. The ghost of Fifth Street Finance Corp still haunts the sector, reminding everyone that transparency is non-negotiable.
Review your current BDC holdings for "fee creep." Look at the Management Discussion and Analysis (MD&A) section of the 10-K filings. If the management is getting paid more while your share price is stagnant, you might be in a Fifth Street situation.
Check the "non-accruals." This is the percentage of loans that aren't making their interest payments. Anything over 3-5% is a massive red flag. Fifth Street had periods where the stress was palpable.
Analyze the "vintage." Loans made in 2021-2022 when interest rates were zero are very different from loans made in 2024-2025. The "Fifth Street style" of lending often ignored the macro environment in favor of hitting quarterly targets. Don't fall for that.
Verify the management alignment. Prefer BDCs where the management team owns a significant chunk of the stock. When they lose money alongside you, they tend to be a lot more careful with who they lend to.
The story of Fifth Street Finance Corp didn't end in a fireball; it ended in a quiet merger and a change of clothes. But for the investors who lost 50% or more of their principal during the mid-2010s, the lesson was loud and clear. High yield is never free.
Next Steps for Investors:
- Audit your portfolio for any externally managed BDCs and compare their expense ratios to internally managed peers like Main Street Capital.
- Search the SEC Edgar database for "Oaktree Specialty Lending Corp" to see the most recent filings and how they have moved away from the old Fifth Street assets.
- Evaluate the "First Lien" percentage in your private credit exposure; if it's less than 70%, you are taking significantly more risk than the current market standard.