American Capital Strategies
American Capital Strategies is a business development company. It has three lines of business:
- is an equity partner in management and employee buyouts;
- provides mezzanine and senior debt financing for buyouts led by private equity firms;
- and provides capital directly to private and public companies.
In other words, it loans money to small, profitable private companies at a high rate of interest, and often it takes an equity position. The interest if receives and the net capital gains fund the dividend payments. Sometimes it buys the company outright but retains the management. Since 1997, ACAS has invested $10 Billion composed of loans and buyouts. Most loans get repaid but ACAS has experienced losses, but at lower percentage than banks.
SEC filing
Outlook
Nov 1, 2006 - ACAS will now have more that $1 Billion, that previous did not earn income, now returning income. This includes the $443 million investment in European Capital, $670 for American Capital equity I, and $215 million in net of companies sold. This should boost earnings in 2007.
ACAS management seeks to change the way investors value ACAS. Currently, investors price ACAS based on its high yield. Based on today's close ACAS yield's 8.30%. In the future, ACAS management wants investors to value ACAS on its earnings growth and as a publicly traded manager of funds of private assets. Today, October 10, 2007, ACAS has a price to earning ratio, PE, of 8. In comparison, the T Rowe Price Group, which manages mutual funds, has a PE of 24. Should investors change the way they value ACAS, a substantial price appreciation could occur while the dividend increases slowly and yield declines. To change investor perception on its value, ACAS intends to create private funds. It has already created European Capital which could return $47 million in fees in 2006 to ACAS. On Oct. 4, 2006 ACAS created American Capital Equity I, more than doubling its asset management business. A group led by HarbourVest Partners and also including Lexington Partners and Partners Group has together, through various managed funds, committed the $1 billion to American Capital Equity I. ACAS sold 30% of its equity to the new funds of $670 million.
ACAS has plans to create private funds in the following categories: Finance, Real Estate, Technology, Energy and special situations. ACAS considers its data base of potential buy out candidates, investment selection skills, and company management as the key factors needed execute this plan successfully. For nearly a year, ACAS has taked about this plan yet aside from European Capital, it has failed to execute, although they have beefed up staff for execution. I think the time is near and when institutional investors observe the execution, then the share price will rise dramatically from today's close of $41.57.
Over the past years, ACAS has traded based on the dividend paid and yield (between 8-10%). ACAS boasts that the appraised value of its equity in the portfolio has grown. In recent quarter net asset has increased dramaticly and likely to continue since ACAS appraises 25% of its portfolio each quarter.
| Year | Increase | Comments |
| 2006 | 352 | For 6 months |
| 2005 | 365 | |
| 2004 | 281 | |
| 2003 | 118 | |
| 2002 | 20 | |
Although the equity continues to appreciate it earns no interest. When it sells the equity, American Capital realizes funds that it can reinvest to earn interest income. The more interest income, the greater the dividend payment to stockholder.
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