ACAS' Exits: An Update

In ACAS' recent announcement of its Narus exit (through transaction yielding $21m to ACAS and its controlled funds, including $12m to ACAS' own top line and $3m to ACAS' bottom line), ACAS included a link to a non-exhaustive page of exits. Presumably, this non-exhaustive page of exits reflects the deals that are material and aren't subject to nondisclosure agreements (some buyers may pay for silence), but if you sort the list by date of exit you'll notice that it hasn't been updated since October of 2009.

Earth to ACAS: as of this writing, that list is close to a year out of date. Inquiring minds want to know, and it's an obvious place for folks checking up on the company's results to look. To avoid looking like ACAS is ashamed of recent results, ACAS should publish them.

Reviewing the list, it's clear that ACAS is willing to confess bad bets publicly (the investments in Stein World, Flexi-Mat, S-Tran Holdings, Weber-Nickel Technologies, and Sunfuel Midstream range from 90% losses to genuine 100% loss), but that some of ACAS' biggest listed investments have had attractive internal rates of return (Extream Software at $548m, Axygen Bioscience at $271m, Evans Analytical at $125m, and HomeAway at $120m had IRRs of 22%, 22%, 80%, and 39%, respectively). Some of the investments that involve well-known names haven't been bad: Piper Aircraft's $91m investment produced an IRR of 19%, and Gibson Guitar's $33m yielded an IRR of 16%. But where's Riddell? Maybe Riddell isn't listed because ACAS kept a couple percent, and is therefore not entirely exited.

The vast majority of ACAS' deals aren't on the web site cheat-sheet. Not appearing anywhere investors can see, though, is something even more important: the vast bulk of deals on which ACAS takes a pass (about which one can read here). To make all that proposed-deal volume valuable, ACAS needs effective screening. The fact that there's a huge volume of prospects is valuable only to the extent ACAS can tell gems from duds. The firm's history of buying investments under conditions designed to result in profitable exits even as multiples contract shows a longstanding plan for conservative purchase, but the recent downturn has rattled confidence in management's ability to pick winners.

Continued exits from investments – especially loser investments – places ACAS in a better cash position (a) when a few hundred million cash will reduce ACAS' interest rate on its entire debt, and (b) just at the time that private companies unable to access capital from gun-shy banks and other sources of funds are even more on-sale than normal due to the P/E multiple contraction, and presumably therefore offer some of the most promising prospective investments. And then there are distress opportunities, in which ACAS has been apparently investing already.

While the risk of double-dip recession remains frightening, the ability to get good deals in purchases of solid businesses seems very attractive: with so few equity buyers, ACAS may be the only game in town, so to speak. The more deals ACAS can review, the more likely ACAS should be to find outstanding winners.

I'm off to do some of my own work, and I'll leave management at ACAS to keep my capital there hard at work while I'm otherwise occupied. The dividend won't exist for another couple of years, I expect, and this cash retention will help ACAS grow NAV and, as the capital base grows, ACAS' profits. I like the long term now as much as ever.

The next couple of quarterly reports should be interesting as we see ACAS' activity to continue improving debt cost and directing its attention away from its own finances and toward the books it needs to review to make good deals. And that, folks, is where I want ACAS' attention directed.