Tuesday, April 14, 2009

ACAS Still Making Money

Buying low and selling high still seems to be working at ACAS, which just announced both a $22 million cash receipt on the sale of a portfolio company, and a $6m net gain. Corrpro's buyer isn't another investment fund, but a pipeline services company making a strategic acquisition. Like HP's purchase of Extream Software, the sale of Corrpro to Insituform Technologies is not a product of speculators' excitement about a flipping game, but a business decision by organizations that produce valuable goods and services that ACAS' portfolio companies make good business sense to buy and run.

ACAS scores the investment as follows:
Including investments in Corrpro by American Capital's affiliated funds under management, total inception to date realized gains and dividends received were $9 million. American Capital's compounded annual rate of return, including interest, dividends and fees earned over the life of its investment was 21%. The proceeds received by American Capital were greater than the fourth quarter 2008 valuation of the investment by $0.5 million, or 2%.
The larger scorecard of exited investments is here, and the existing catalog of portfolio companies can be viewed here. Since the information there doesn't provide averages weighted by ACAS' amount invested, it's worth looking at ACAS' report on its overall returns:

Since American Capital's August 1997 IPO through the fourth quarter of 2008, the company has earned a 17% compounded annual return, including interest, dividends, fees and net gains, on 249 realizations of senior debt, subordinated debt and equity investments, totaling $11 billion of committed capital. These realizations represent 47% of all amounts invested by American Capital since its August 1997 IPO. Proceeds from these realizations exceeded the total associated prior quarter valuation of the investments by less than 1%. American Capital earned a 30% compounded annual return on the exit of its equity investments, including dividends, fees and net gains.
The question on everyone's mind is, of course, whether what's left unsold is some kind of awful witch's brew of unsalable failures. Management has dealt with this issue in conference calls, and reports interest in exiting losers in order to recover capital it could more effectively deploy; thus, it isn't exiting only winners in order to build a large stable of losers. The exited portfolio company listing reinforces this: it's got investments that apparently went to zero, and it admits the fact.

I don't have any special reason to conclude that ACAS lies about its holdings or their quality. I think the fact that ACAS has reported paper losses suggests that it takes its accounting responsibilities seriously despite viewing the applicable accounting principles as virtualy useless for producing information about its portfolio's past or prospective performance.

The data in which I am most interested is ACAS' future NOI. ACAS' ability to continue realizing interest income on debt investments is of more interest to me than the theoretical market value of those debt investments. ACAS' receipts of income from portfolio companies are of more import to me than the companies' modeled valuation. What I want to know is pretty simple: outside valuation models notwithstanding, how are ACAS' investments actually performing?

This is what I'm looking for going forward. If NOI is good, ACAS is probably a steal. If NOI collapses, the whole thing is probably a bust. Based on management's comments about its interest coverage, I'm inclined optimistically for ACAS.

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