Flickr / Marcy Kellar.

Yesterday, American Capital Ltd. (NASDAQ: ACAS) suspended a nearly-3-year-old share buyback program. In the press release, it noted that it was assessing its corporate structure, leading me to believe that a spin-off is imminent.

The question is: what assets will be spun off, and what will a reorganized American Capital Ltd. look like?

From the horse’s mouth
American Capital’s fourth quarter conference call was loaded with questions related to a potential spin off. I went back to look.

In an exchange between an analyst and American Capital management, it became clear that American Capital Asset Management, the company behind American Capital Mortgage (NASDAQ: MTGE) and American Capital Agency (NASDAQ:AGNC), is the real prized asset to be spun out.

I agree. American Capital’s asset manager generates relatively steady fee income primarily from its mortgage REITs. The asset manager has also been the single largest source of growth in its net asset value for several years running.

A one-step spin-off
On the fourth-quarter conference call, American Capital CFO John Erickson explained a potential spin-off:

“[T]he better way to think of it would be that you would spin out the BDC and leave the asset manager at ACAS. And ACAS really transforms itself to ACAM.”

This is a simple spin-off where American Capital spins out all of its portfolio investments in a new, publicly-traded entity. American Capital Ltd. then holds just one asset, American Capital Asset Management.

What it would look like
Let’s see what American Capital Ltd. would look like if it separated American Capital Asset Management from its other assets.

The asset manager is currently valued at $870 million. American Capital Ltd. also has a tax asset worth $414 million, which means that it would not pay taxes on the next $1.18 billion in net income at a tax rate of 35%.

Based on the asset manager's 2013 dividend of $105 million, it could generate tax-free earnings for investors for more than a decade.

Valuing American Capital’s asset manager
What’s American Capital Asset Management worth? American Capital thinks about $870 million, but it could be worth far more.

Traditional asset managers like T. Rowe Price trade at 16 times earnings. The same multiple would put ACAM’s valuation at $1.68 billion, nearly 2 times its current carrying value at American Capital.

Would investors pay 16 times earnings for American Capital Asset Management?

Potentially. Remember, asset management requires very little, if any, investment capital. Virtually all of the earnings could be paid out in the form of dividends, which, at 16 times earnings, would result in a yield of 6% per year. (American Capital Asset Management would generate about $0.35 per share in annual income by itself.)

The key is the mortgage REIT business. If American Capital Agency and American Capital Mortgage can reverse their recent course, and trade above book value, they could raise more capital, generating bigger fees for ACAM.

Growth, then, is only limited by investor appetite for high-yield mortgage REITs.

The Foolish bottom line
Spinning out the asset management business may be the best move American Capital has ever made in its history. The asset manager is a unique asset, one which may remain permanently undervalued if held with other BDC assets.

No one can say for certainty that the sum of the parts is worth more than the whole. But one thing is certain: there are many, many investors who would own the asset manager, but not the BDC. That typically sets the stage for a spin-off that creates enormous value for shareholders.