The term "mezzanine financing" probably doesn't ring any bells, let alone get you excited about investment possibilities. Yet for many investors, it's becoming an increasingly profitable way to back the next growth stock story. Is it any wonder, then, that American Capital Strategies
Sitting in the mezzanine
Business development companies (BDCs) like American Capital pair debt or a debt-like instrument with an equity stake in a growing company. Similar to REITs, BDCs offer a tax structure where 90% of taxable income is passed on to shareholders. In this case, American Capital currently pays shareholders a high 7.9% dividend -- a subtle twist from typical buyout funds, because the funds generate significant income from interest payments on the debt.
There are dozens and dozens of BDCs to invest in. Allied Capital
CAPS player seadragons thinks American Capital's management sets it apart from other BDCs and ensures that the dividend remains intact. "I like an 8% dividend with a history of being raised regularly and a management that states flat-out it won't declare a dividend it thinks it'll ever reduce. It's a hedge against price erosion. Then I look at the capital appreciation happening underneath, and I see dollar signs....I see ACAS as a long-term growth story which, unlike Berkshire Hathaway
That's a sentiment echoed by jerkimo, who says, "Their investment choices are solid and their returns have been stellar. Dividend will continue and probably grow given their track record. Management seems committed to putting their cash to best possible use for shareholders. Look for more positive returns from this company for quite some time."
While there are risks inherent in BDCs -- risks generally related to complexity and the increasing number of private equity funds chasing limited numbers of investments -- I have to agree with the CAPS community that this publicly traded private equity investor is worth serious consideration. Because the mezzanine fund niche is not yet saturated, American Capital Strategies is still able to negotiate its deals from a position of strength. Add in a stable and growing dividend and it looks like an investment that can be hit into the mezzanines.
Other five-star investments that American Capital bulls are bullish on include Altria
- American Capital: The Private-Equity Steamroller
- How Allied Capital Won the War
- American Capital: An Investing Gorilla
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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. Berkshire Hathaway and Chesapeake Energy are recommendations of Motley Fool Inside Value. Berkshire is also a recommendation of Motley Fool Stock Advisor. The Motley Fool has a disclosure policy.