MVC Capital (NYSE:MVC) is structured as a business-development company (BDC), but it acts a lot like a private-equity firm -- it invests in the common stock and debt of private companies. However, the way it invests could mean that it won't feel the credit crunch as much as some private-equity outfits might. If the latest quarterly report is any indication, in fact, MVC looks to be doing quite well. So well, in fact, that it's going on a spending spree.
MVC just posted its 15th straight profitable quarter and saw its net asset value (NAV) increase to $14.98 per share as of July 31. (The company reports that its NAV as of Aug. 31 was $15.05.)
With its $120 million sale in June of Baltic Motors, MVC had to find a bunch of companies in which to invest, lest its capital sit around in a bank account earning a meager return. And sure enough, it appears that the company is already taking advantage of the recent credit crunch: It invested $42 million, or 11% of its total NAV, during the quarter.
Unlike a private-equity firm, MVC invests its own money. And being structured as a BDC, it doesn't pay taxes as long as it pays out most of its income in dividends, similar to how a real estate investment trust operates. Also unlike most public companies, BDCs have to mark to market the value of their investments. That means that NAV is a good estimate of the value of such a company. And MVC, at a recent price of $16.70 per share, is trading at an 11% premium to its NAV. Most BDCs trade at a modest premium to NAV: MCG Capital (NASDAQ:MCGC) is at a 7% premium, and American Capital Strategies (NASDAQ:ACAS) stands at 9%.
We hear news every day about continued tightening in lending standards and problems that some private-equity firms are having closing large deals. However, unlike such firms as Blackstone (NYSE:BX), MVC Capital doesn't rely on the availability of cheap debt for its profits. In fact, 57% of the company's investments are in debt or preferred stock. As banks tighten their lending standards because of subprime-mortgage problems, small- to medium-sized private companies will find it harder to borrow money. But MVC stands to gain as competition to make those loans decreases and interest increases.
MVC is clearly in the mood to spend. Add in the $18 million the company pledged to U.S. Gas & Electric and an announced deal of indeterminate size to buy a number of European Ford dealerships, and MVC Capital is well on its way to putting its cash to good use.
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