American Capital Strategies: Overblown Fears Present a Value Opportunity

American Capital Strategies (ACAS) is the largest publicly traded Private Equity Firm operating in the United States with over $15 billion in assets under management. According to its website American Capital Strategies is "an investor in management and employee buyouts, private equity buyouts, and early stage and mature private and public companies. American Capital provides senior debt, mezzanine debt and equity to fund growth, acquisitions, recapitalizations and securitizations. American Capital and its affiliates invest from $5 million to $800 million per company in North America and €5 million to €500 million per company in Europe."

Recently, concerns regarding the real estate market and the subprime mortgage market have caused shares in ACAS to tank falling over 19% from its 52 week high in a span of roughly six months. These fears are, however, overblown and have created a significant value opportunity for prudent investors seeking both high income and a chance of capital appreciation.

First, ACAS is an extremely diversified firm with investments across many industries and geogrpahic locations with relatively little exposure to the current residential real estate and subprime mortgage woes.

Second, the company pays a very large dividend and is currently yielding over 8 percent giving the company's shares a high degree of yield support.

Third, the company enjoys an excellent credit rating, which means the company has an extremely low cost of capital thus ensuring any capital raised is very likely to be able to be invested at extremely beneficial rates as far as shareholders are concerned.

Morevover, any concerns that private equity firms, hedge funds, and other alternative asset management firms will face any changes in their tax structure, which would severely impact earning of such firms is unlikely for several reasons (a small but very vocal group of Senators and Representatives are currently calling for such a change). Such a change in the tax structure lacks widespread support in either the House of Representatives or the Senate. Furthermore, President Bush is unlikely to be sympathetic to such a change in the tax structure as are the major Presidential candidates form both the Democratic Party and the Republican Party considering the vast and deep ties the leading candidates have within the industry.

Disclosure: I own shares in this company and am bullish on its prospects.

ACAS 1-yr chart