QUOTE AND NEWS
Motley Fool  Jul 12  Comment 
American Capital Ltd. closes another managed CLO, building on its best-performing unit: structured credit.
Market Intelligence Center  Jul 8  Comment 
American Capital Ltd (ACAS) presents a trading opportunity that offers a 6.23% return in just 193 days. A covered call on American Capital Strategies at the $15.00 level expiring on Jan. '15 offers an assigned return rate of 6.23% or 11.79%...
SeekingAlpha  May 28  Comment 
By Philip Mause: American Capital (ACAS) is a business development company which had a near death experience in the Panic of 2008 but has rebounded smartly. It has a very large tax loss carry forward and has elected not to be treated as a RIC...
SeekingAlpha  May 8  Comment 
American Capital (ACAS) Q1 2014 Earnings Call May 08, 2014 11:00 am ET Executives Pete Deoudes - Vice President of Investor Relations Malon Wilkus - Founder, Chief Executive Officer, Chairman, and Chairman of Executive Committee ...
TheStreet.com  May 7  Comment 
NEW YORK (TheStreet) -- American Capital was gaining 4.6% to $15.70 Wednesday after launching a $1.1 billion private equity fund. The fund, called American Capital Equity III, will focus on investing in companies in the middle market. The...
TheStreet.com  Mar 31  Comment 
NEW YORK (TheStreet) -- American Capital  rose 8.09% to $15.36 at 10:03 a.m. on Monday after the company announced it had purchased 8.9 million of its own shares and suspended its share repurchase program. American Capital purchased the shares...
StreetInsider.com  Mar 31  Comment 
Visit StreetInsider.com at http://www.streetinsider.com/Corporate+News/American+Capital+%28ACAS%29+Updates+on+Buyback+Program/9330673.html for the full story.
TheStreet.com  Feb 11  Comment 
NEW YORK (TheStreet) -- American Capital  is lower on Tuesday after revenue and net operating income came in lower than expected. By midafternoon, shares had taken off 7.1% to $14.81. In the three months to December, American Capital reported...
SeekingAlpha  Jan 21  Comment 
By Jaded Consumer: Background: The Buyback Program American Capital Ltd. (ACAS) evokes strong emotions in those who experienced its collapse as investors in the meltdown that began in 2008. This article doesn't look at pre-2008 metrics to...
SeekingAlpha  Dec 1  Comment 
ByClayton Rulli: A long time friend of mine and fellow writer here at Seeking Alpha, Brett Moll, and I often share investing ideas. In particular with Brett, small cap stocks as well as companies undergoing dramatic turnarounds often take a front...




 

American Capital Strategies (NYSE:ACAS) is the largest business development company in the U.S., with $15 billion in assets under management, and the only one in the S&P 500.[1] that makes investments of $5 million to $800 million in companies whose employees and management hold a large ownership stake, makes loans to private equity firms, and provides capital to public and private companies by issuing loans or in exchange for equity.[2] As ACAS manages such a large amount of money, it is able to invest in larger companies as well invest in a wider variety of companies across many industries than many of its competitors. ACAS has also less debt than its competitors.[3] With a lower debt-to-equity-ratio and diverse portfolio, ACAS is less vulnerable to the volatility in earnings of the companies it invests in. ACAS is vulnerable though to investors' diminishing appetite for risk as investors tend to consider stocks of alternative asset managers including ACAS to be riskier than those of most other industries; the cycliality of the American and European economies, since a slowdown in either economy would reduce the earnings of the companies it invests in; increasing interest rates as a result of the credit crunch as it would have to pay more to maintain its debt; or legislation increasing taxes on private equity fund managers as fund managers raise fees for its investors to make up the loss.

Company Overview

ACAS serves buyout markets--whether by private equity, employees, or management--and makes both early and mature-stage investments in both public and private companies. During an average week the company will have $30 billion of investment opportunities under review.

American Capital is registered as a business development company (BDC), requiring them to payout most of their earnings to shareholders. The company seeks to be the leader in providing capital to middle-market companies, in many cases taking control of the company being financed. The company has also pursued a strategy to migrate much of their income towards asset management through the establishment of off-balance sheet private equity and debt securitization funds.

Its business consists of two primary segments: its investment portfolio and its alternative asset management business. ACAS targets primarily middle-market companies for investment, committing roughly $5 million to $800 million per company. ACAS holds an extremely diversified portfolio with with portfolio companies in almost every sector.[4]

The main distinction between its investment portfolio and its alternative asset management business is that in its investment portfolio, ACAS commits mainly its own funds, whereas in its alternative asset business, ACAS raises funds from investors to invest with and collects management and performance fees.

The Special Situations Group invests in troubled and distressed situations including operational turnarounds, auctions, corporate and orphan carve-outs, portfolio add-ons, complex management buyouts and provides debtor-in-possession (DIP) financing, exit, mezzanine for sponsored buyouts, second lien refinance, and direct lending to distressed companies.

The Second Lien Group offers secured and unsecured junior capital investments to support an array of financing needs across a variety of industries primarily, focusing on syndicated junior capital opportunities sourced through the loan sales desks of the market's growing junior capital arranger community. ACAS prefers to invest in manufacturing, services, and distribution companies. The firm also makes investments in companies that provide services or products to federal, state, or local governments, focusing on information technology for custom information technology solutions, technology and software enabling headcount reduction, technology and software enabling cost reductions in conducting transactions with or within government.

Business & Financial Metrics[5]

In 2009, ACAS incurred a net loss of $678 million on revenues of $697 million. This represents a turnaround from 2008, when the company earned $525 million on $1.05 billion in revenue.

American Capital's Investment Portfolio

With this side of its business, American Capital provides investment capital to middle market companies generally within the range of $10 million to $750 million. Historically, American Capital's provides funding to support management and employee buyouts (MBO's), in which the company's existing managers or employees acquire a large part or all of the company. American Capital generally invests senior debt; and mezzanine debt and equity for buyouts of private companies sponsored by American Capital or other companies. American Capital also provides capital directly to early and mature stage public and private companies as its portfolio companies. American Capital also invests in structured finance investments, such as commercial mortgage backed securities (CMBS), commercial collateralized loan obligations (CLO) securities, and collateralized debt obligations (CDO) securities.[6]

American Capital's Alternative Asset Management

American Capital manages over $17 billion worth of alternative assets across five funds:

  • European Capital (LSE: ECAS) is a public traded investment company established in 2005 for pan-European equity, mezzanine, and senior debt investments with capital resources of €2.3 billion. This fund invests in and sponsors management/employee buyouts (MBO's), invests in private equity buyouts, and provides capital directly to private and public companies headquartered predominately in Europe. European Capital generally invests between €5 million and €500 million per transaction.
  • American Capital Equity I ("ACE I") is a $1 billion private equity fund managed by American Capital established in October 2006. ACE I purchased 30% of American Capital's equity interest in 96 portfolio companies.
  • American Capital Equity II ("ACE II") is a $0.5 billion private equity fund managed by American Capital established in October 2007. ACE II purchased 17% of American Capital's equity interest in 80 portfolio companies.
  • American Capital CLO 2007-1 ("ACAS CLO 2007-1") was established in 2006 and invests in broadly syndicated and middle market senior loans. American Capital purchased 55% of the BB rated notes and 70% of the non-rated subordinated notes in ACAS CLO 2007-1 and has $0.4 billion is total assets.
  • American Capital CRE CDO ("ACAS CRE CDO") is a commercial real estate collaterialized debt obligation trust that holds investments in subordinated tranches of CMBS trusts. This fund holds investment grade and non-investment grade notes and preferred shares of ACAS CRE CDO with $0.6 billion in total assets.

Key Trends and Forces

Investors' Diminishing Appetite for Risk

As investors become less willing to invest in higher risk assets, demand for ACAS stock falls, as well as ACAS' ability to finance its transactions. A principal feature of the private equity industry is its extensive use of debt to finance transactions, usually in the form of high yield bonds. As investors with assets in the high-risk subprime lending industry lost money, investors have become more risk-averse to other high-risk assets; as a result, it has become more difficult for private equity firms and the investment banks that structure their deals to find buyers for these high-risk high yield bonds (also known as "junk bonds")[7] These bonds are critical to private equity firms' continued ability to finance their operations.

Interest Rates

Increased interest rates increase the amount ACAS has to pay in order to take on debt. If interest rates rise, the cost of borrowing becomes higher, so the gross required return necessitated by an investment becomes higher. As such, private equity firms would make undertake fewer investment opportunities. Also, increasing interest rates would encourage investors to put more money towards savings accounts instead of higher-risk assets. Likewise, investors would be less inclined to purchase ACAS stock.

Potential Legislation

A variant of the Baucus-Grassley and Levin-Rangel bills in Congress if passed would raise the amount of tax private equity and hedge fund managers pay on carried interest. Fund managers would need to negotiate larger portions of the carry away from investors to make up the difference, which would make fund raising more difficult. Fewer assets under management slows earnings.

The Appreciating Euro Relative to the U.S. Dollar

The exchange rate would help American Capital bring better returns to U.S. stockholders as 17% of American Capital's portfolio is based in Europe.

The State of the American and European Economies

ACAS has investments across many industries in both the American and European economies. As ACAS hold a portfolio across many industries in both economies, their aggregate performance is largely reflective of that of the greater economy.

Competitors

Among publicly-traded business development companies, American Capital doesn't face much competition as this field is fairly small. As of late though, it's competitors have been performing well in comparison. Its competition includes:

References

  1. ACAS 10-Q, page 58
  2. ACAS Company Website - Our Business page
  3. ACAS Annual Report, page 5
  4. ACAS Annual Report, page 7
  5. -ACAS 2009 10-K pg. 40  
  6. ACAS Annual Report, page 10
  7. Reuters - Junk Bonds Fall on Subprime Concerns
  8. Allied Capital - Who We Are page
  9. Gladstone Company Homepage
  10. Apollo - Our Business page
  11. Prospect Energy Company homepage
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