Friday, September 2, 2011

ACAS: Nice Gain Selling Another Portfolio Company

Today, American Capital Ltd. announced the August 26 closing of the sale of its portfolio company VP Acquisition Holdings Inc. ("Value Plastics") for a quarter of a billion dollars. Because some of the company's equity was held in funds under management, ACAS' own proceeds received were $138m – for a recognized gain of $93m, subject to post-closing adjustments.

Value Plastics was founded in 1968; ACAS first invested in it in October of 2005 when it invested $89m in a recapitalization. Over the life of ACAS' investment, ACAS realized a compounded annual return of 29%. The proceeds received in the third quarter of 2011 were $33m greater than the FAS-157-compliant "fair value" reported at the close of the second quarter of 2011. This resulted in a realization of 31% greater proceeds than would have been projected from the prior-quarter valuation.

Although many of ACAS' portfolio company liquidations result in a realization that is within a few percent of prior-listed values, some of the portfolio can be marketed for significantly more. The inability of investors to divine which is which is a concern that bears some thinking. Assuming that management can tell the difference (else, above-valuation sale would not occur), this suggests a certain degree of upside surprise in connection with those portfolio companies that – for whatever reason – are not accurately valued using the methodology ACAS is obliged to apply to its portfolio.

This issue – whether ACAS' management has superior insight into the value of certain illiquid investments – is in play when considering ACAS' publicly-traded managed funds (e.g., AGNC and MTGE). Is ACAS able to buy below real value? Is it able to detect misvalued risks, and underpay for guaranteed loan packages? The fact that AGNC has mostly traded at a premium to NAV suggests that the market is placing a premium on ACAS' investment acumen. Whether MTGE's performance rates such a valuation has yet to be determined. If ACAS is using MTGE to purchase loan packages whose guarantors are not the U.S. government, it may be using perceived risk to obtain a "discount" to real risks it is able to assess through its experience with loan bundle performance.

Whatever the fate of MTGE may be, ACAS has demonstrated continued ability both to raise cash and to realize gains, both of which will be important to remaining atop its debt concerns and placing itself in a position to resume mandatory dividends based on taxable gains.


Anonymous said...

Hi Jaded,

Great article as always. ACAS's financials are really complicated and you've really helped me make some wise decisions, like when I doubled down when the stock was at 2.83. Add in the shares bought at 36 and 15 and 11 and I'm about even on a cost basis.

So here's my question, at their current earnings rate when do you think a dividend will be reinstated and how large? And how vulnerable is their profitability to AGNC and say a 150 basis point rise in interest rates over the next 2 years?

Any insight appreciated


Jaded Consumer said...

My reply was too long. See the next post :-)