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American Capital: The Private-Equity Steamroller

To quote Jerry Lee Lewis, "Great balls of fire!" This was one smokin' hot quarter for American Capital Strategies (Nasdaq: ACAS  ) , and the steamroller isn't letting up anytime soon. The middle-market lender and alternative-asset manager is forecasting a strong 2007, no doubt leaving Income Investor subscribers dancing in the streets. Far from picking up nickels in front of a steamroller, these investors are in the driver's seat.

Why all the cheering? For one thing, the dividend increased 11% year over year, and the company forecast identical dividend growth in 2007. The company also projects a huge 15%-25% increase in net asset value (NAV) in 2007, which is substantial, when we consider that most business-development companies (BDCs) have boosted their NAVs by the high single digits. More importantly, in a gun-shy credit market after New Century's (NYSE: NEW  ) recent blow-up, the company pointed to the strength in the loans underlying its portfolio of commercial mortgage-backed securities to assuage any potential investor concerns.

American Capital CEO Malon Wilkus chose to highlight the company's growing business in alternative-asset management, which currently stands at $11 billion and is projected to roughly double in the next year to somewhere between $17 billion and $23 billion. While shareholders will reap only 20% of any gains from this type of business, that slice of a rapidly growing pie is nothing to sneeze at. It's no small surprise that Wilkus mentions this; he clearly hopes that the asset-management business will prompt investors to award the stock with a premium valuation more typical of asset managers like Blackrock (NYSE: BLK  ) or Fortress (NYSE: FIG  ) . I, for one, would like to see more results from the business before stepping up my valuation, but I can't deny the potential for serious value creation here.

This quarter highlights the differences between various BDCs' strategies. American Capital is focused on making wise investments ($1.7 billion in the last quarter) and growing a new asset-management business. Allied Capital (NYSE: ALD  ) is focused on achieving the best total returns for shareholders via a combination of capital gains and interest income, while Apollo Investment (NYSE: AINV  ) focuses on debt securities with a value emphasis. If nothing else, it's proof that there are many ways to achieve outstanding shareholder returns.

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Fool contributor Stephen Ellis does not own shares in any companies mentioned. You can view the stocks he owns and check out his 99th-percentile ranking in Motley Fool CAPS, the Fool's new stock-rating community. The Motley Fool has a disclosure policy.

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