Access to private equity and hedge fund investments used to be reserved solely for the super rich and institutional investors. American Capital Ltd (ACAS) currently offers a unique opportunity for non-institutional investors to invest in private equity at a deep discount to its intrinsic value.
American Capital is a publicly traded private equity firm and global asset manager with $57 billion in assets under management. Their main focus is on middle market companies in which they make investments between $10 million to $100mm. The company’s portfolio is very well diversified across multiple industries and sectors with approximately 152 companies in their investment portfolio. Since ACAS has been well covered by many articles in Seeking Alpha, I will not go into detail on the company. Instead, I recommend reading the Q3 2011 fact sheet presentation on the investor relations section of their website, which contains excellent information.
American Capital’s stock has been under tremendous selling pressure since August due to the combination of the general market sell-off in Q3 and heavy liquidation from John Paulson’s funds. During the third quarter of 2011, the Russell 2000 index declined by 22% and the iShares iBoxx High Yield corporate bond ETF (HYG) fell by 9%. American Capital’s net asset value (NAV) dropped by 9.4% to $11.92/share during the quarter while the stock price has fallen by 26% since the end of Q2.
John Paulson purchased 43.7mm shares of ACAS in April 2010 at $5.06. His funds have recently been liquidating shares of ACAS. The most recent filings on Bloomberg showed his position has been reduced to 32.8mm shares as of 12/22/11. Many of Paulson’s holdings came under heavy selling pressure last quarter as market participants smelled blood and drove down prices of his positions.
As previously mentioned, American Capital’s stated net asset value at the end of Q3 was $11.92/share. While it is difficult to estimate the current net asset value due to the uncertainty of ACAS’s diverse investment portfolio, it is reasonable to assume that book value may have increased since they last reported. Since their portfolio consists of a well diversified mix of both equity and debt investments in small cap companies, it should be highly correlated to the performance of the Russell 2000 and HYG. The Russell 2000 gained 15% during Q4 2011 and the HYG was up 8%. Using a blend of 25% Russell and 75% HYG as a proxy, would indicate that NAV may have increased by 9.75% to $13.08/share during the fourth quarter. Based on yesterday’s closing price of $7.34, ACAS may be trading at as much as 44% discount to NAV.
The recent actions of management also indicate their belief that shares are deeply undervalued. The company announced that they repurchased 8.4mm shares at $6.97 so far this quarter. That buyback comes on the heels of 9.1mm shares repurchased at $8.21 last quarter. Normally, I do not care for share repurchase programs as they have been responsible for so much value destruction in recent years. But, in this instance, where the company is able to repurchase stock at .56X book value, it is immediately accretive to shareholders and an attractive use of capital. Management is also vested. The CEO, Malon Wilkus owned 1.45mm shares as of his last filing.
American Capital’s stock offers compelling upside potential for those who believe the economy is on the mend. ACAS also trades at a steep discount to its peers. KKR & Co. L.P (KKR), The Blackstone Group L.P (BX) and Fortress Investment Group LLC (FIG) trade at 2.45X book, 4.14X book and 3.89x book, respectively.
I recommend buying ACAS at current prices vs. shorting an equivalent dollar amount of the S&P500 or a combination of HYG and S&P500 in order to minimize market risk.