American Capital (NASDAQ:ACAS)
June 12, 2013 12:05 pm ET
Malon Wilkus - Founder, Chairman, Chief Executive Officer and Chairman of Executive Committee
All right. It's my pleasure to welcome American Capital to the Morgan Stanley Financials Conference. My name is Vincent Kintek [ph] with the Specialty Finance Research practice here in Morgan Stanley. And I'll just kick off with Malon Wilkus, the Chairman and CEO of American Capital.
Thank you, Vincent. Thank you, everybody, for joining us today. And what I would like to do is go through a short presentation as quickly as I can and move to questions. And I think we'll have a chance to sit down and take some of your questions as well. But American Capital is founded back in 1986. We went public in '97 and we really were, I suppose, second to Onix here up in Canada as the second publicly traded public equity firm, maybe the first, really, the first in the United States. We've become a leading manager of an investor in alternative assets, with $21 billion of earning assets under management. And when $6 billion of that is on our balance sheet, $15 billion is externally managed. And when you include levered assets, we have $112 billion of assets under management.
We do our management out of 8 offices, 350 employees in the U.S. and Europe. You can see the growth of our assets under management. The gold portion in this chart represents those assets on our balance sheet. And this is our earning assets under management. And once again, the gold represents the assets on our balance sheet. So we've reached $21 billion of earning assets under management.
We manage this with 350 people. We have 36 investment teams, 107 investment professionals. We are unusual and we have a 34-person Valuation and Audit Team on staff. We're also unusual although we have a very large Operations Team with 17 people, 10 former CEOs and Presidents on staff that can take, bring large-company expertise down to middle-market companies. And we have a 5-person Syndications Team because when we do a buyout, or One Stop Buyout, we will keep the mezzanine and equity, but we'll rapidly syndicate up the senior debt. And that team, last year, syndicated and refinanced about $2.4 billion of our middle-market companies to gain them lower financing costs. We have a 30 -- 23-person Legal Team and 8-person Human Resource Team.
So looking at our business lines. We have the first one on the left here is our operating companies, where we have $2.3 billion invested. Secondly, we have our Sponsor Finance team and business line, where we have $906 million. So our operating companies are where we do our One Stop Buyouts and we are invested in companies across many industries. We have certain areas of expertise. But these are buyouts. We're investing buyouts in our second line of business, which is our Sponsor Finance, where we have $900 million invested and this is other people's buyouts where we're providing mezzanine financing or unitranche or second lien financing.
Third is our Asset Management business. That is a portfolio company of ours, but we view it as a business line and that is valued at $1 billion and it's managing our, as you'll see later, 8 different funds to which are public. Fourth, we have European Capital, where we have $900 million invested. That does similar investing as the first 2 business lines but, of course, in Europe. And then finally, we have $230 million invested in Structured Products, predominantly CLOs, where we also manage 3 other CLOs.
So if you look at it from this point of view, our revenues are coming from 4 main areas. Our assets are in 6 main areas.
And let's start with our private finance business. We've invested $21 billion there in over 375 portfolio companies in the United States. And that totals $11 billion and 115 American Capital One Stop Buyouts and $8 billion in over 160 private equity buyouts sponsored by over 150 private equity firms. So American Capital is steeped in buyout financing, investing in the risk capital in middle-market buyouts.
In addition, we've invested $2 billion directly into 105 portfolio companies. And in our private finance business, we've produced a 12% IRR on $16 billion of exited investments in a blend of senior debt, mezzanine debt and equity. And on the equity-only portions of those investments, we've reached the 27% IRR, which would put us in the top quartile of performance in private equity.
So breaking down our private finance business. First with our operating companies, we have 44 operating companies, companies like AAMCO Transmission and Rug Doctor. And then a whole slew of other companies that you would never have heard of, operating and making, for instance, a torque wrench that's used in putting in pacemakers and defibrillators into people's bodies, and other companies that make various industrial products. We make tax strips [ph] for homes. And we also, for that matter, in the mortgage industry, we have the largest firm that does nonclosing documentation that is electronic closing documentations and we serve many of the major banks in the United States.
But we have $3.5 billion of revenues in our operating companies, $750 million of EBITDA. And you can see in our buyout business, we've not only done a lot of One Stop Buyouts, but we've done quite a bit of add-on acquisitions. About 1/3 of our buyouts, we've done add-on acquisitions. And that's where we have funded acquisitions. They've probably done twice as much based on their own financings.
So you can see in this chart we've invested $11 billion in our One Stop Buyout. We've got a blended return of 12%, and that's on a blend of senior debt, sub-debt and equity investing. We've exited over 95% of that $11 billion, $10 billion that we've exited, and we've got a 15% blended IRR but a 28% return on the equity in those transactions. So obviously, we wait until we get the best opportunity to exit to get the highest return on equity. And that's why we've had such great track record on our private equity investments.
Our Sponsor Finance business where we're funding other people's buyouts, we've done $8 billion investing there in over 160 buyouts sponsored by over 150 private equity firms. We have an 8% IRR there on $10 billion of investments and 9% IRR of $8 billion of exited investments over the last 14 years.
In our Asset Management business, we manage 8 funds, 2 of which are public. So we have our private finance investing and that's at American Capital Equity 1 and American Capital Equity II. Today, those funds have originally started at $1,760,000,000. They're down to about a total of $800 million, but these are 2 private equity funds. The first one we are in the money on our carried interest. The second one, we're just barely below it. But for these static pools, the first one was done in 2006 and the second one was done in 2007. So for those vantages, we've performed quite well. Then we have invested $1.5 billion in assets in Europe. And then as you know, we manage American Capital Agency, a $12 billion market cap company, and American Capital Mortgage, a $1.5 billion market cap company. And we earn management fees on those 2. And those are just about the permanent capital as you can get. And so the fee income that we earn on those 2 REITs are very highly consistent and predictable. And together with all of the capital that we manage, we're able to value American Capital Asset Management at about $1 billion. We also manage 3 CLOs. The first one completed in '07. That CLO has outperformed our original forecast, putting us in the top 5 percentile of performance in CLO management. And with that track record, we were able to raise a second CLO in the middle of last year. And then most recently, this first quarter this year, we raised our third CLO. And we're working hard to raise more CLOs, as well as to raise additional funds to manage. And some of you may know, we've brought on board Paul Hanrahan, who is the former CEO for the last 9 years at AES, a global energy company, to lead our energy and infrastructure team and to -- and we're in the process of raising a fund around Paul and his team.
European Capital. That was founded back in 2005. It does buyouts and Sponsor Finance investing in Europe. We've invested $3.5 billion in over 105 portfolio companies since inception. We did pick a particularly tough time to start investing in Europe. So our investments there have reached a 4% return or a 7% return on our exited investments. We are working hard to continue to improve those performance levels. We -- so I want to kind of conclude my remarks by talking about the drivers of the growth of our net asset value. Since the third quarter of 2009, we've produced a 31% annualized growth in our book value. And we believe there's still great potential to increase our book value and grow American Capital, and that first of all, is the fact that we have $1.5 billion of equity stakes in portfolio companies. That's -- those equity stakes are designed to grow at equity rates of return in the level of capital structure through organic growth, add-on acquisitions and continual operational improvements.
Secondly, we're continuing to grow our $1 billion equity investment in American Capital Asset Management by expanding existing funds, levering our existing capital structure there and raising new funds. Third, we have the potential for appreciation in the $790 million of the equity that we have in European Capital. It's been growing quite well over the last 4 years. And not only do we think our equity there will grow, but the net asset value of European Capital we believe has been growing and we think there's an opportunity for that to continue to grow. For instance, there's $140 million of bond yield discounts at European Capital and that's with the performing loans. If we were to collect that as those loans come due, we'll pick up that discount to NAV.
And then American Capital has our investment in European Capital discounted at $142 million below European Capital's book value. So over time, we think we can translate that back up to book and also collect, I should have said, $105 million of bond yield discount.
In addition, we have a share repurchase program. It was established back in 7 quarters ago. We have bought back through the end of the first quarter $624 million of our stock, 18% of the shares outstanding. And that's been $1.23 percent -- $1.23 accretive to our NAV. We find our current price-to-book to be extremely attractive. And so we expect to continue to buy shares through that program although those -- that decision is made on a quarterly basis by our Board of Directors.
And then lastly, we have $513 million of net operating loss carryforwards and $346 million of net capital loss carryforwards. We are working hard to optimize those 2 tax assets. And so this chart shows you the buyback program that we've been implementing. And in the first quarter of this year, we did the largest amount of buyouts -- buybacks at $128 million. And then finally, to show you our book value since 2009, it's grown at a 40% rate and it ended the first quarter of this year at $19.04. And with that, I think I'll stop and open it up for questions and perhaps, Vince, I'll...
Yes, I'll kick it off with the first one. And it's about the 5 different segments that you have and the different opportunities that's -- within those. Where do you see near-term opportunities? And where would you put your incremental investment?
Look, we believe in all of our business lines. These are the business lines that we're talking about here. And they really all have great opportunities. Our operating companies, our One Stop Buyouts, we have a tremendous track record there. There is less M&A today than ever before, but we do believe that we could find opportunities if we look closely and work hard. We have a very large infrastructure to bring in opportunities and we've been successful with that. So we've done 3 new buyouts since December. One was in the oil field service industry. Another one was in health care services, supporting the pharmaceutical industry. And the third was a -- done by our Special Situations team that specializes in troubled situations. And we bought an HVAC company that is underperforming. We bought it at very low price. It has the largest revenues in our portfolio. And so we think there's great opportunities there. Our Sponsor Finance business, there's a lot of competition for providing debt financing to buyouts today. But we've invested $150 million in the last 2 quarters in that area and we think there's still continue to be good opportunities there. It won't be tremendous volumes, but there is still very -- some very fine opportunities there to produce very good spread and income.
Our Asset Management company, we have a whole set of funds that we're working on in development. You can never be sure whether any of those will be launched. But we are -- I can just tell you that we're working on quite a number. We think we have a chance to continue to grow that business. It's been our fastest-growing company. And I think everyone knows that a lot of that growth was due to our 2 REITs. They've been exceptional performers. And though this is not the best time to continue to grow agency-focused REITs, we do believe that opportunity will come back around probably sooner than the people expect. And European Capital, we think that there's still fine opportunities to re-appreciate European Capital, and we're working hard at that. And then finally, our Structured Products business, we think our CLO business has lots and lots of opportunities and we're working very hard on several different CLOS that we hope to take to market. I don't know if that covered it.
That's great. We'll open up the questions to the audience. Okay, I'll have another one while we're polling. So the stock trades at a meaningful discount to NAV and given your strong opportunities that I'm just wondering where you think your incremental dollar capital, where would you put it to work? Would it be in new investments here or share purchases? How are you thinking about that?
Look, our stock buyback program has been exceptional and produced accretive great deal of value to our book value. And we're great believers in it. I hate the fact that our stock is trading below book the way it has, but I love to be a buyer at these prices. So we're going to take advantage of those people that choose to exit our shares at these levels. It is always hard to decide whether to buy back shares versus make new investments. Up until now, we've, of course, been using a lot of our liquidity to reduce our debt load. Fundamentally, we had too great of a debt load going into the recession. And today, we're fundamentally -- as a result of that, we've paid down over $6 billion worth of debt in the last 5 years. And so we're at the level of debt that's just fine in our view. So there's no more need to deploy or redeploy our liquidity into paying down debt. So then it comes to whether there's good investment opportunities. Certainly, we think we made some very good investments in the last several quarters and that -- but at the same time, we've also taken advantage of and bought back a lot of shares as I've pointed out earlier. And we will continue to really pursue all of those things. We think you need a rounded business for the market to trade you to book. And so we're going to continue to work hard doing those things. And finally, I'll say that we are limited to our share buyback program to buying back no more than 50% of our shares over a 3-year period and that would also include anybody else that either exceeds or drops below 5% ownerships. So the 382 limitations does limit us to how many shares we can buy back on a regular basis in a 3-year time frame.
Great. Any questions from the audience? Okay. I'll ask one final one. So we've been hearing from other specialty lenders that there's been competition ir -- in the lending space. I'm wondering what you're seeing in the market and particularly if interest rates have any -- and what impact that might have?
Look, there's no less capital today available to fund buyout activity with debt. There's no less today as there was in 2007, but the M&A volume of activity is about 15% of what it was in '07 for private equity. And so you have a lot of capital chasing investments and lending into these buyouts. Now I do believe the market has continued to be focused and while efficient, still providing good returns. And so even if market rates, you are getting some of the best spreads as there's been historically. So I think at these levels, it still makes our good risk return levels for mezzanine, second lien and unitranche. If they were to drop below these levels, then you've got to start to wonder. And there is a lot of competition out there. And so not only is there is a same amount of capital, but there are now 40 BDCs whereas back in '07, there was far less than when you go back to 2003 or 2000. In the early 2000, dramatically less BDCs out there. On the other hand, in private equity, there is many private equity firms that will never raise another fund. They still exist today, but they're going out of business. It will take the time for that to happen in the end, but they -- there is less and less competition in private equity. But on the other hand and unfortunately, I sound like an economist, there is dramatically less M&A activity for private equity to be competing for and strategic buyers who become a higher percentage of buyout buyers in the private equity in the M&A activity. So I happen to think that there's more opportunity, somewhat more opportunities in the private equity side than in the mezzanine and Sponsor Finance business, but that could change, and we are prepared to pursue both areas. We think both business lines would make a lot of sense for us and our shareholders.
Okay, great. Last poll for any questions from audience.
I've got to have at least one question. Come on. There's got to be someone who has a compelling question.
I guess we'll wrap up there.
Well I appreciate it very much. Thank you, all.
All right, thank you.
Thank you for joining us. Take care.
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