Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



American Capital Ltd. Makes a Move

It's crunch time.

American Capital Ltd. (NASDAQ: ACAS  ) has been in near-liquidation mode as it seeks to move its existing assets off its own balance sheet to become more of an asset manager than an asset owner.

This week, the company announced a major deal that would allow it to cash out of some of its largest equity investments.

American Capital's ACE III is a new private equity fund that will help American Capital Ltd. sell and transfer ownership to new investors. In doing so, American Capital can liquidate some of its investment portfolio and grow the fee generation power of American Capital Asset Management (ACAM), its largest portfolio company. ACAM currently generates the bulk of its fee income from publicly traded mortgage REITs, American Capital Agency (NASDAQ: AGNC  ) and American Capital Mortgage (NASDAQ: MTGE  ) , which have been in a slow decline.

ACE III will include $1.1 billion in capital, with the bulk ($0.9 billion), coming from outside investors. American Capital will effectively sell its stakes in seven portfolio companies -- SMG Holdings, CIBT Investment Holdings, FAMS Acquisition, Mirion Technologies, Affordable Care Holdings, PHI Acquisitions, Avalon Laboratories, and WRH -- at a $640 million valuation, assuming the option to buy WRH is exercised.

WRH isn't a guaranteed entrant into the new private equity fund. The buyers have an option to buy WRH, and given its past performance, the option may not be exercised. WRH has been an absolute loser for American Capital, falling in value to $118 million from an original cost basis of $341 million.

Much of the decline in its value happened over 2013, where its fair value reported by American Capital plunged by more than 40%. (Going back as far as the end of 2010, WRH was valued at half its cost basis. This has been a very volatile holding, but it's been down much more than it's been up.)

The overall deal, valued at $640 million, represents a 10% discount to the fair values as of December 31, 2013 ($711 million). A 10% discount for such a large sale is more than fair -- especially since American Capital Ltd. will recoup some of the discount from on-going fees paid to American Capital Asset Management for overseeing ACE III.

Valuing the fee contribution
American Capital's previous ACE private equity funds have delivered excellent fee-generation power from a combination of management and incentive fees. ACE I and ACE II generate 2% management fees with incentive fees up to 30% and 35% of gains, respectively.

At a 2% management fee, ACE III would deliver $18 million in outside fees from investors. According to American Capital, the cost to manage the fund should be in the range of $6 million, overhead it intends to transfer to ACAM from American Capital Ltd. That's a minimum of $12 million per year in additional gross profits to American Capital Asset Management. 

The Foolish bottom line
ACE III is good news all the way around. First, it provides evidence that American Capital's reported fair values are consistent with what real buyers are willing to pay. Secondly, it showcases how American Capital can transfer its owned assets off balance sheet while creating a very valuable income stream in the form of management fees. It's a win-win all around.

High yields with huge tax advantages
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2014, at 8:16 AM, dsandman999 wrote:

    What effect to ACAS's book value will moving that much in assets off of its books have?

    Right now, the BV is over $19 but sp is less than $15. ACAS buys shares back instead of paying dividends when the SP is less than BV. How much closer to that $15 will the book value be and how much close could ACAS be to paying dividends again? You can't really shrink to success forever. :)

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2949329, ~/Articles/ArticleHandler.aspx, 9/4/2015 5:29:02 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Jordan Wathen

"The liabilities are always 100 percent good. It’s the assets you have to worry about." - Charlie Munger

Today's Market

updated Moments ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 3:59 PM
ACAS $13.65 Down -0.05 -0.36%
American Capital,… CAPS Rating: ****
AGNC $18.98 Down -0.21 -1.09%
American Capital A… CAPS Rating: ****
MTGE $15.10 Down -0.12 -0.79%
American Capital M… CAPS Rating: ****