Gladstone Investment Corporation (ticker: GAIN) announced that it sold its equity investment and received full repayment of its debt investment in A. Stucki Holding Corporation (“A. Stucki”) in connection with the acquisition of 100% of the outstanding capital stock of A. Stucki by an affiliate of Quad-C Management, Inc., together with certain members of the management of A. Stucki. [Gladstone Investment is one of the smallewr Business Development Companies or "BDC" ].
The net cash proceeds to Gladstone Investment from the sale of its equity in A. Stucki were $21.7 million, resulting in a realized gain of $17.2 million. At the same time, the company has received $30.6 million in payment of its principal, accrued interest and fees on the loans to A. Stucki.
In March 2007, Gladstone Investment made its original equity investment and provided debt financing in support of a management-led buyout of A. Stucki. This is a 5.0 times return on our equity investment, including dividends received, in a bit over three years, which equates to a 65.7% annual return on our equity investment.
Gladstone Investment has enjoyed an excellent working relationship with the talented management team at A. Stucki. The team has achieved outstanding results in growing the business and building value in a challenging economic environment,” said Dave Dullum, the company’s President. “In addition to the monthly dividends we pay to our stockholders from the current income on our debt and mezzanine investments, we also seek to achieve capital gains from the equity portions of our investments. In this regard, the A. Stucki transaction is a significant and successful realization of a capital gain from our investment strategy. We look forward to more investments like this one.
We thought the successful exit was worth mentioning for a couple of reasons. One, the very substantial gain for GAIN is the first exit achieved on this small BDC’s portfolio five years after it’s initial public offering. The Realized Gain is equal to one-third of the aggregate Realized Losses GAIN has incurred in its history, which is quite a coup.
As we know only too well from our own experience in the lower middle-market segment of the private equity business, finding a high paying exit for a portfolio company is a feat worth noting. Presumably, management will take this success as a validation of its buy and hold strategy of control stakes in smaller companies. Unfortunately, the nature of the beast is that when and if another exit will occur is impossible to say.
Two, every silver lining has a cloud, and in this case Gladstone has a re-investment problem. The company was already under-leveraged and under invested before the Stucki sale. Now GAIN has received $31mn in loan repayments, or 15% of the total investment portfolio at cost. Thankfully the loans were not particularly high yielding, but as the 10-K shows, the Stucki loans still contributed 10% of GAIN’s revenues. Moreover, since the March 31 2010 year end, GAIN received another sizeable pay-off from another portfolio company ($6.8mn). That means nearly 20% of the total investment portfolio has been re-circulating back into cash in recent weeks.
GAIN is going to have make some new investments to be able to maintain its dividend. We’ve been hearing from a number of sources that there is a rising tide of M&A opportunities in the lower middle market (principally driven by the new tax law and the long enforced hiatus in deal doing brought on by the Great Recession) so GAIN may be able to deploy it’s capital soon, and at higher yields than before. No word,though, from the company in recent weeks about new deals done.
We may have one of those ironic quarters coming up when GAIN has substantial Realized Gains to report, but lower earnings until new activity gets going. The SEC filings say the company is limited by its bank agreement to only dividending what is earned. We don’t know if the Realized Gains count in this regard, so there’s a chance GAIN could be forced to cut its dividends if earnings do temporarily drop, unless management negotiates for some forbearance with its lenders.
Certainly GAIN’s balance sheet seems bullet proof, with virtually no non performing loans, no debt outstanding and a (slightly) improving economy and portfolio.
Disclosure: Author holds no position in GAIN