Tuesday, July 13, 2010

On Recent ACAS Exits

ACAS' recent completion of its debt exchange has freed it to direct its attention on its primary business: making deals in the middle market.

ACAS' subsidiary ECAS has converted some assets from equity and debt holdings in GO Voyages to cold hard cash in the amount of €74m, realizing en passant a double-digit rate of return (16% mezzanine rate and 19% equity rate) including the realization of €10m in equity gains. ECAS exits have been few, as the press release states that the only other ECAS exit in 2010 has been the Spotless Group exit.

ACAS' exits from its non-ECAS portfolio have, by contrast, included a number of smaller, not announced transactions that will be harder for investors to follow. For example, the unreported exit of ACAS from Resort Funding Holdings Inc. in the second quarter was described by an anonymous poster as likely resulting in a $25m loss; in the last-filed 10-Q, ACAS had disclosed its Resort Funding Holdings investment as having a value of $7.4m, consisting of $7.4m in 8.2% senior notes valued at face value, and common stock valued at zero (with a basis of $20.5m). According the poster, the exit occurred in 2Q and the earnings release made later in Q3 will reflect the disappearance of the investment. ACAS has been able to IPO holdings such as RRTS, but withdrew another IPO when pricing did not meet management's standards. Being a patient investor, ACAS can wait for the market to better appreciate interesting alternative-energy technology and compliance plays like Mirion; however, investors have a hard time keeping up with the deals that result from ACAS' investment operations. Unlike Cramer, however, who hates ACAS in part for what he refers to as "opacity", the Jaded Consumer likes that ACAS can do deals under the radar: ACAS can enter deals no-one else has seen, and find buyers who value the secrecy of deals that give it a competitive edge without drawing attention. Selling Naurus to Boeing shows ACAS' capability to find strategic buyers, rather than depending on private investors or IPOs for its exit strategy. Although the details of the Naurus exit aren't yet known, the strategic value of portfolio companies to publicly-traded would-be parents may offer rich valuations: HP previously bought Extream Software from ACAS for $5m over the prior-quarter "fair value". Cybersecurity is valuable, and an aerospace giant like Boeing with international corporate espionage concerns may be willing to pay top dollar for outstanding talent and technology.

ACAS should keep doing deals. Investments in which management has lost confidence should be exited to allow capital to be deployed more productively (and to realize losses that will help ACAS keep down required dividend payments; dividends of BDCs are based by law on taxable income and not SEC-reported "income" that includes unrealized changes in portfolio values). Investments that have succeeded well enough that buyers offer a strong price for a holding should be considered for sale in light of the alternate available investments, the benefit of holding for ongoing income from the portfolio company, and the premium offered by buyers to management's assessment of the investment's true value.

Growing ACAS will allow ACAS easier access to cash when it has payments to make, and returning to business as usual may aid ACAS in returning to the days of NAV premiums as usual. In the meantime, ACAS' operations can't turn on what people will or won't think about ACAS' share valuations. ACAS must look to the long-term returns of its portfolio, one deal at a time, and try to buy excellent companies cheaply and, having grown them with the aid of its in-house operations experts, sell them as dearly as possible.

Warren Buffet's comment is appropriate: In the short term, the market may be a voting machine; but in the long run, it is a weighing machine. Like ACAS' management, we may do best being patient investors. Here at the Jaded Consumer, news of ACAS' results in this arena are

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