American Capital Ltd (Nasdaq: ACAS) is one of the most unheralded and downright ignored finance stories in the Mid-Atlantic. In the past decade, American Capital has added scores of middle market acquisitions and investments to its portfolios, making most private equity funds in the country look like slackers and dabblers. It has built up a major army of deal-doers and processors to follow its investments—135 professionals in 9 offices. It has invested $32 billion in 515 companies, through a variety of products from buyouts to real estate. It went public in 1997, long before the Wall Street private equity funds discovered the joys of public ownership, and American Capital has used its public status relentlessly to raise funds for its huge appetite. We’ve always looked on American Capital as an innovator in the brave new world of investing, a company akin to Milken’s model for high yield debt. If you amass enough of the same asset class and you price it properly, then you have enough diversity to survive the predictable losses in the portfolio. Some of the larger private venture funds like NEA begin to approach this model, but for the majority of private equity, the funds are bedeviled by limited diversification and extreme variability in returns.
Beyond this praise, it has always been a question whether American Capital really had the winning, long-term model. There are really no other public companies pursuing this strategy on any scale, which gives one pause. There have been similar models that stumbled in the past like Sirrom Capital in the world of mezzanine finance. And finally, this terrible economy is stressing every financial model on the planet. In September, there was a small announcement that American Capital had to enter into forbearance agreements with certain holders of $393M of its privately placed notes. This is not good news. The company, like many other companies, is having to renegotiate its debt. The stock price is down from $50 to $3.50 per share in the last two years. American Capital still has a market cap of almost $1 billion, so nobody is throwing in the towel. But $50 to $3.50 is an eye-popping amount of lost value. The question remains about how easy it is to make money investing in middle market companies. What’s the best model and can you institutionalize it?
