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WIKI ANALYSIS
Allied Capital Corporation (NYSE:ALD) is a business development company with $4.4 billion invested in private companies and $5.1 billion in total assets. [1] ALD typically makes investments up to $250 million in buyouts, acquisitions, recapitalizations, growth capital and middle market debt and equity.
As a business development company, Allied Capital is required to invest at least 70% of its assets in private U.S. companies and provides investors with the opportunity to become a part of the private equity industry by issuing stock.
Allied targets companies with strong cash flow and high returns on invested capital, providing debt and equity financing with senior debt loans and subordinated debt, as well as managerial advising for invested companies. The company has a low 67% debt to equity ratio, which lets it to take larger risks than other financial institutions. Due to the difficulty of evaluating the private companies it invests in, this ratio is useful in making the illiquid long-term investments Allied Capital typically undertakes.
Allied Capital relies on low interest rates to decrease the cost of loans and increase profit margins. Also, it is difficult for Allied to evaluate the companies it invests in, since there is no public information on these private companies. As such, Allied relies on its own valuation techniques to determine good long-term investments, which increases the risk involved. These long-term investments can prove detrimental to the liquidity of Allied Capital's assets.
As of March 2008, Allied Capital's portfolio included 124 companies that generate aggregate annual revenues of over $13 billion and employ over 98,000 people. [2]
Business Overview
Allied Capital Corporation is a private equity firm that specializes in buyouts, acquisitions, and middle market equity and Long Term Debt investments in companies from various industries. Allied focuses on private middle market companies in the U.S.. [4]
Allied Capital maintains a diversified investments portfolio in companies from numerous industries, with no single asset comprising of over 4% of total assets. This diversified approach helps protect against risk and loss in any particular industry.
As of December 31, 2007, Allied's portfolio included 120 companies that generate a total of $13 billion in revenue and employ 95,000 people. Known as a BDC, or business development company, Allied returns a large portion of earnings to investors.
Allied's dividend has had an annual growth rate of around 8% over the past decade. Return on equity has averaged 15% since 1997. Also, its ratio of debt to equity is about 67%, which is below the regulated cap of 100% for business development companies. [5]
Allied Capital usually offers long-term investments and does not exit them until the companies are sold, recapitalized or carry out an Initial Public Offering.
Business Development Company
A business development company is founded with the purpose of lending and investing in private companies. As a business development company (BDC), Allied is required to invest at least 70% of its assets in private U.S. companies. Allied Capital focuses primarily on American companies that are not investment companies. Allied also provides managerial assistance to any companies in need of it.
A business development company provides shareholders the ability to retain the liquidity of a publicly traded stock, while sharing in the possible benefits, if any, of investing in primarily privately owned companies.
Private Equity Investing
Allied Capital's primary strategy is based on making long-term investments in the debt and equity of middle market companies. These long-term investments are illiquid, since they cannot be traded. However, long-term investments can provide persistent cash flow. From 1998 to 2007, Allied realized $1.4 billion in cumulative net gains from its investment portfolio.
From 2001 to 2006, Allied saw a steady increase in net realized gains. From 1997 to December 31, 2007, Allied's combined aggregate cash flow internal rate of return, or IRR, has been approximately 21% for private finance and real estate-related CMBS/CDO investments exited during this period.
In August 2007, Allied exited its largest investment, Mercury Air Centers, in which it received an appreciation of $160 million on its initial investment, to help realize a total gain of $264 million on the year on all investments.
Private Finance Portfolio
Capital is generally used to fund buyouts, acquisitions, recapitalizations, growth, and note purchases. Allied Capital generally invests in middle market companies, which are those with $50 to $500 million in revenues. Industries of interest typically include business services, financial services, consumer products, and retail, among others. The corporation balances debt investments and buyout investments, and usually targets debt investments of between $10 and $150 million dollars, and buyout investments of up to $300 million.
73.3% of the private finance portfolio consists of loans and debt securities, whereas the other 23.7% consists of equity securities.[8]
Since 2001, dividends have increasingly come from net capital gains, with a decreasing amount coming from ordinary income.
Trends and Forces
High interest rates hurt profit margin
As interest rates rise, the cost of borrowing also rises. As a private equity firm, Allied Capital depends on loans in order to invest in other companies. When the interest rates are low, Allied would be able to realize greater profit margins since it would have to pay back less. As interest rates rise, Allied would see a slimmer profit margin. With interest rates at historic lows, Allied Capital is able to borrow at a low cost.[9]
Uncertain valuation of assets increases risk
As Allied Capital invests primarily in private companies, there is no readily available market value for its investments. There is often no public information on these companies, and thus there is no standard method in determining the fair value of the companies. Allied relies on the Board of Directors of the companies as well as on its own employees to effectively evaluate the companies. They are also forced to obtain correct information about the target companies by comparisons with other public firms and on the basis of expected cash flow. [10]
Long-term portfolio faces liquidity problems
Most transactions are privately negotiated and there is no established trading market. Allied's problem of illiquidity hurts its ability to get rid of debt and equity securities. Without access to equity capital, Allied's dividend growth will decrease. However, since Allied is a BDC, it is able to generate more liquidity through the sale of publicly traded stock.
High risk investments in private companies
Allied Capital invests primarily in private middle-market companies over the long term. Investing in private companies brings with it a large amount of risk. There is often no public information on these companies, and thus Allied relies on the efficiency of its own employees to obtain correct information about the target companies by comparisons with other public firms and on the basis of expected cash flow.[11]
Competition
Below is a list of Allied Capital's main competitors. Allied Capital is generally more diverse than these competitors, and besides American Capital Strategies, Allied is the only publicly traded BDC in existence.
American Capital Strategies (ACAS) - invests in mid-sized companies. Provides debt-financing for buyouts, and also provides capital directly to private and public firms.
MCG Capital (MCGC) - a private BDC that invests in small to mid-sized companies, and deals with leveraged buyouts, acquisitions, and growth financings.
Apollo Investment (AINV) - uses Mezzanine loans and senior loans to invest in mid-sized companies.
Gladstone Capital (GLAD) - a public investment firm that invests primarily in debt security in small and medium sized companies.
Capital Southwest (CSWC) - focuses primarily in venture capital and private equity investments in small and mid-sized firms.
| Competitors | TTM Sales ($ Million) | Market Cap ($ Million) | Quarterly Revenue Growth | Revenue (million) |
| Allied Capital Corporation | 457 | 4749 | 36.70% | 483.7 |
| American Capital Strategies | 1348 | 8434 | 16.80% | 1270 |
| MCG Capital Corp | 160 | 919 | 7.10% | 190 |
| Apollo Investment Corp | 271 | 2257 | 20.10% | 356 |
| Gladstone Capital Corp | 33 | 301 | 31.30% | 42.56 |
| Capital Southwest Corp | 7 | 484 | -19.40% | 6.79 |
TTM Sales are that sales from the last twelve months, which provides insight into the companies' activities for the past year. Market Cap helps understand how large a company is, and quarterly growth gives an idea of the companies' most recent progress.
References
- ↑ Allied Capital Annual Report 2007
- ↑ Allied Capital: Who we are
- ↑ Allied Capital Annual Report 2007
- ↑ Allied Capital Annual Report 2007
- ↑ Allied Capital Annual Report 2007
- ↑ Allied Capital Annual Report 2007
- ↑ Allied Capital Annual Report 2007
- ↑ Allied Capital Annual Report 2007
- ↑ Allied Capital Annual Report 2007
- ↑ Allied Capital Annual Report 2007
- ↑ Allied Capital Annual Report 2007
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