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Executives

Amanda Cuthbertson - Director, IR

Malon Wilkus - Chairman, CEO and President

John Erickson - EVP and CFO

Samuel A. Flax - EVP and General Counsel

Analysts

Sanjay Sakhrani - Keefe, Bruyette & Woods

Jim Shanahan - Wachovia

Vernon Plack - BB&T Capital Markets

Carl Drake - SunTrust Robinson Humphrey

Troy Ward - Stifel Nicolaus

Robert Napoli - Piper Jaffray

Jim Ballan - Bear Stearns

Dan Furtado - Jefferies & Co.

Ajay Jain - UBS

Matthew Howlett - Fox-Pitt Kelton

Greg Hillman - First Wilshire Securities

American Capital Strategies Ltd. (ACAS) Q4 FY07 Earnings Call February 13, 2008 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the American Capital Shareholders' Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your first speaker Ms. Amanda Cuthbertson. Please go ahead.

Amanda Cuthbertson - Director, Investor Relations

Thanks Stacy, and thanks for joining American Capital's fourth quarter 2007 earnings call. Before we begin, I would like to review the Safe Harbor statement. This conference call, and corresponding slide presentation, contains statements that, to the extent they are not representation of historical facts, constitute forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast, due to the impact of many factors beyond the control of American Capital. We do not undertake to update our forward-looking statements unless required by law. An archive of this presentation will be available on our website and the telephone recording can be accessed through February 27th, by dialing 800-475-6701, the replay passcode is 906180.

To view the Q4 slide presentation, please turn to our website, americancapital.com. Click on the Q4 2007 Shareholder Presentation link, in the upper right corner, select the conference call option if you want to view the streaming slide presentation on the web, or the webcast option for both sides and the audio. If you have any trouble with the webcast during the presentation, please hit F5 refresh.

And with that, I will turn the call over to Malon Wilkus, Chairman and CEO of American Capital. Malon?

Malon Wilkus - Chairman, Chief Executive Officer and President

Amanda, thank you so much. And thanks everyone for joining us. Here with me today is Ira Wagner, our Chief Operating Officer; John Erickson, our CFO; and Rich Konzmann, who heads up our Financial Reporting.

This has been a great time to be levered less than one-to-one debt-to-equity. And we said that many times before, but it is in these times when you recognize how important that is. So, when other institutions are fighting for their survival, when they have a few, or significant write-off, that's simply not the case for American Capital and we levered... I think we levered up 0.75 to 1, and it's just a very comfortable place to be. It allows us to take advantage of tremendous opportunities that exist in a market like today, and prepare ourselves well if we're going through recession this year, and take advantage of the opportunities that present themselves through a recession. And I can assure you the opportunities are tremendous in this kind of environment just as they were, if you recall, back in 2001and 2002 when we went through a similar kind of environment.

So let's move on to slide 5, dividend highlights. And we have now declared $27.17 in dividends since we went public. In '07, we realized earnings per basic share covered our 2007 dividend by a 125%, just simply outstanding coverage of our dividend. We had an $3.72 in total dividends paid in '07, a 12% increase in '06, and that was paid a 111 million from our '06 ordinary taxable income that we rolled over into '07 and pay the dividend. And it was paid by 544 million in 2007 ordinary taxable income. And as you can see later that was not all of our ordinary taxable income in '07. We rolled over quite a bit into '08. And none of the dividend in '07 use up any of our net taxable long-term gains, which we haven't rolled over into '08 to cover the '08 dividends, and we'll talk about that in a minute.

So if you go to slide 6, you'll see that we are forecasting a 30 % increase in our '08 dividend. We have already declared $1.01 dividend for the first quarter, and that's a 13% growth over our Q1 '07 dividend. It's $0.01 increase over Q4 '07 and it is expected to be paid from 2007 excess ordinary taxable income. So, just to make clear here that the all... the first quarter of '07 dividend is going to be paid from last year's excess ordinary taxable income.

We are forecasting $4.19 for the whole year-end dividends that would a 13% increase over '07. And we are anticipating that the second quarter '08 dividend will include... will be paid in part by the '07 net taxable long-term capital gains. So you won't see... so for people, who are getting their forms, you will see... you won't see until the second quarter the use of the '07 long-term capital gains to cover the dividend.

Our 2008 quarterly dividend per share forecast is, as we've already declared 101 for the first quarter, 103 for the second, 105 for the third, and $1.10 for the fourth quarter; those will be 13%... 13%, 14% and 10% increase over their prior quarters of '07 dividends.

And if you turn to slide 7, you'll see what I believe is perhaps one of the best records of covering of the dividend with ordinary taxable income of any firm in our industry, 100% over the last ten years. So, 100% of our dividends over the last ten years was covered by ordinary taxable income. And from the samplings that we have done, I think for the top five or six, BDCs out there, we found none that didn't... haven't had to use capital gains to cover the dividend in part. So, whether... I think we are... I think quite possibly, we are the only firm out there that have covered their dividend 100% by ordinary taxable income, certainly the only one who has done it for ten years.

If you move to slide 8, in fact, to give you more statistics on that. Over the last ten years, if you go to the right side of that slide, our $25.95 in dividends, 96% of that was covered by ordinary... by, I am sorry, by net operating income. 100% by ordinary taxable income, but as you know, our ordinary taxable income over the last ten years has exceeded our net operating income. But nonetheless, our net operating income covered 96% of all the dividends we've ever paid since we went public ten years ago. And when you add to it then our net gains, we have exceeded the dividends by a 107%. And then over five years it was 96% covered by NOI and 113% by realized earnings, over the last three year it was 96%, again, by coverage by NOI and 124% by realized earnings and the last year, it was still an extremely outstanding 92% coverage by NOI and what was particularly outstanding is that 125% coverage by our realized earnings. And again, I don't... I just don't think anyone tracks well with that kind of performance.

Please go to slide 9... and by the way going back to slide 8, we've done that while having today about 25% of our assets in equity investments of portfolio companies. That's not including our equity stake in European Capital where the portfolio very much is we have here and we get great income off of it. So, 25% of our assets is in equity stakes and yet our net operating income has tremendous performance of covering the dividend. And actually our 25% in equity compares quite closely with several other of the larger BDCs and it's been, and recently bring it up as it noted that somehow is a, presents a challenge for us, but in retrospect, I think, you can see that it's only been very good for our shareholders.

If you look at slide 9 now, you can see... and... I think we all are aware that not only might we be in a recession today, but we most certainly could very well be in recession this year. And, I think it's worth reviewing how American Capital performs through the last recession and you can see here that on slide 9 that we raised our dividend every quarter through the last recession, and actually had a quite substantial dividend growth rate during the last recession. And we did that as LIBOR was coming down, was very flat as just as it's doing right now.

And if you move to the next slide, you can see that through the last recession, when LIBOR came down so much, our interest coverage ratio actually improved. I think that would be counterintuitive to a lot of people, but... and you can note here that our interest coverage ratio went into the last recession, the quarter before the last recession began at 2.1 interest coverage ratio and I might point out that we are currently at 2.0, so virtually identical. And then, it actually rose through the last recession quarter-by-quarter. In part that was due to the fact that LIBOR came down and so interest expense, particularly, senior interest expense for portfolio companies came down during that time period. Also, we were able to recycle our capital into much wider spread investment. Not because we were investing in more troubled companies, but because we were investing in some of the very best companies, and it was only the very best companies that could access capital during the last recession, and I anticipate that would be the case if we run into a recession in this year or next. So, our interest coverage performs very well.

If you will move on to 2007, and slide... I am sorry, slide 12 in the financial highlights for 2007, they were excellent, we had $3.42 in NOI which was a 9% increase over 06, 11% return on equity. We had 465 in realized earnings per basic share, 5% increase over 06, a 15% return on equity. And that, as we mentioned earlier, was 125% coverage of the $3.72 in dividend that we paid in 07. And that realized earnings was the net operating income plus the 214 of net realized gains that we had in 07.

Our earnings came in at $4.03, a 12% return on equity. That... there you added another $106 million of net realized gains and net depreciation; we had $32.88 of net asset value and $3.46 increase in our net asset value per share. So, it's 12% growth over 2006 in our net asset value which is excellent.

Going to slide 13, you can see that growth in our net asset value marching up very nicely over the last five years... over the last six years. And just to point out that we are trading, I don't know what we are trading at the moment. But we are trading at about one times outlook value. So we think this is just an excellent... American Capital offers an excellent value opportunity for investors today.

If you go to slide 14 for the fourth quarter we have had $0.91 NOI per basic share, which is outstanding 17% increase in Q4 and it... versus our guidance of $0.79 to $0.84. it's 11% return on equity, and our NOI increased nicely, in part, because we're already experiencing this increasing, widening of spread. So, we can invest at higher interest rates plus our cost of capital is dropping a little bit because LIBOR is dropping and the net result is spreads increase and we get an improvement in our net operating income. Just as we've explained happens through a recessionary environment.

Keep in mind, American Capital is this very basic growth in income firm. In good times we get a great appreciation on this modest amount of equity stakes that we have in portfolio companies. And... but yet we're subject to some spread compression and pressure on our NOI. But the gains and appreciation overwhelms that compression. And then in bad times we might see some depreciation on our assets, but we will get wonderful increases in spread income. And our net operating income goes up, and that's already you're starting to see that already in the fourth quarter of 07.

Our realized earnings was a $1.14, a 2% increase over the year before, 14% annualized return on equity. And that covered our fourth quarter dividend by 114%. So the $1 dividend that we paid in Q4 covered 114% by realized earning. And then we had a net loss of a $1.27 or 15... negative 15% return on equity, resulting from the $417 million of net depreciation and gain that we booked in the fourth quarter and let's talk about those.

If your turn to slide 15. You can see on slide 15 we had... if you look at the top of the chart, the private finance portfolio, which is our investing in change of control transactions and direct investment. It's our buyout business and our sponsored finance business. You can see that we've had $41 million in the fourth quarter, $220 million for the whole year of gains, net capital gains for our private finance portfolio.

If you look down to the next section you can see the private finance portfolio also appreciated $60 million in the fourth quarter, a 117 for the year. So, our private finance portfolio is just doing wonderfully well. Then if you continue at the bottom section, there you can see that there was reversals of appreciation associated with the gains from the private finance portfolio, representing $59 million of our depreciation for the quarter and $167 million for the year.

Below that line, you can see that European Capital depreciated $225 million for the quarter to $280 million for the year. And that's simply the stock price of European Capital plus a modest control premium for European Capital, both of which dropped in this last quarter. And as a result, the European Capital valuation dropped. But keep in mind, European Capital continues to pay us wonderful dividends and we are and our management feed [ph] of European Capital irrespective of this kind of depreciation. And we ultimately expect that European Capital will be performing extremely well as it has been in the quarters that we've reported since our IPO.

The next line item is foreign currency translation, that relates, to the most part, with European Capital; and you can see a $37 million of depreciation there and $98 million for the year. Then American Capital, LLC, which is our asset management portfolio company, we own 100% of it, and it is through that portfolio company that manages our various funds in the management. And American Capital, LLC had $87 million of depreciation. And if you recall, we have to deconsolidate it in the second quarter of last year; we were required to do so. And in doing so we valued it based on comparable alternative asset management companies. So, as you all know they depreciated in this last quarter as much as we'd hope to for American Capital valuation to rise to them, instead the ops had currently came down closer to us and as a result, we booked this depreciation for American Capital, LLC.

But again... once again, the income off of American Capital, LLC, the management income, has nothing to do with that depreciation and so we're still booking the same income off of it. And if alternative asset management companies re-appreciate and as we roll out more funds under management, American Capital, LLC we expect to get more and more valuable.

Below that is our commercial CLOs and our commercial mortgage-backed securities investments. And you can see we had $132 million depreciation for the quarter, $203 million for the year. Those... the depreciation associated there was associated to declines in pricing, which... actually we have a slide on, later in this presentation, for the commercial... for our CMBS assets, so you can see very clearly the changes in pricing which causes us to have to revalue, in this case, depreciate the existing investments that we have there. Of course, if the pricing were to change in the opposite direction next quarter, and if performance continues according to plan, then we would re-appreciate these assets. And, of course, these assets were required to value them on a trading basis, but they don't trade and as a result, they really... the valuation is tied to pricing and we intend to hold these assets to maturity, if they perform according to plan in terms of the loss rates on the underlying collateral, then over time, we will get back this depreciation in the form of future appreciation and gains.

Below that is our interest rate derivatives, which we're required to have for our term securitization that locks... helps us to lock in our interest rate spread on our existing assets. And, they depreciated $55 million for the quarter and $80 million for the year.

So, we've kind of explained all this on Slide 16. I've just gone through that. We can answer more questions on it when we come to the question period if you like.

Let's turn to Slide 18. We had a tremendous amount of liquidity in 2007. We expect that to continue to great extent in 2008. $4.5 billion of realization, $3.2 billion coming from principal payments and loan sales, $1.6 billion of that is our senior loans syndications. We had $402 million that we received in selling assets to the... our commercial mortgage-backed security assets to the Commercial Real Estate (CEO) that we manage, and, $976 million when we... proceeds received from the exit of the portfolios companies of equity investments, and it includes $488 million from the sale of equity assets to American Capital Equity too, which is part of our asset management strategy. And then we had $41 million of net portfolio realized gains.

So, if you go to slide 19, this is a new chart you haven't seen before, but it does show you the degree of liquidity that we have in our portfolio. And you can see that $4.5 billion that I just described to you in the last slide, overall in the right bar of this chart. And then the line actually is showing that amount of liquidity divided by the four quarters earlier assets under management. And so it's a liquidity chart. And you can see that we have 56% of the asset that we started '07 with, we got back in liquidity. We turned around and reinvested in new portfolio companies. About half of that, I think, 30-some percent was invested in the second half of the year since the credit crunch.

So, tremendous liquidity off of our asset and part of the reason for that, as noted in the subtitle here, is that we control 56% of our assets. So unlike a finance company which has to kind of sit and wait for somebody else to decide to pay them, we can actually decide to put a company up for sale. And in fact we have controlling interest on a very substantial portion of our assets.

And you go to slide 20, and you can see that we also had tremendous liquidity from capital raises that we raised $5.3 billion of capital in '07; seven different ways. I think we do have the broadest potentials and opportunities of raising capital of about any private equity or firm and or mezzanine fund that I know of and of any BDC that I know of. And that gives us just tremendous flexibility in how we manage ourselves. How we work through credit crunches like we are in right now.

You look on slide 21, that we just continued with the prior slide of showing you some additional ways in which we raise capital in 07.

Then slide 22 specifically describes how we sold the $585 million worth of equity stakes in our portfolio to American Capital Equity too. And I have been on... I did about three weeks of traveling around meeting with institutions in the last several months, and one of the things that everyone had questions about is the quality of our assets.

And, of course, because of concerns about a possible recession, and one thing we can point out is that we had six of some of the finest investors in private equity spending five months scouring through our portfolio, looking at our riskiest investment, in fact all of them, and end up buying all 80 of them, representing a 17% strip of everyone of them. They bought it at the fair value at the end of the second quarter. And they turned around and invited us to manage those assets on their behalf on a two... with a 2% management fee and 30% carried interest. So, if you are worried, at all, about our assets, you would be most worried about our equity assets. And I think you should just feel a lot of comfort that we just sold $585 million of those assets. And just to remind you, a year earlier we sold another $1.1 billion on those assets.

Slide 23 points out that we've always... not only that we have one the lowest levered financial statements in the world of public financial institutions. But we have one of the most conservative managed balance sheets just with respect to managing our borrowing. And you can see in '08 we have very little amount of debit that comes due, in 09 it is a modest amount as well, and so forth. It's not until 2012 that we have any real material amount of debt that comes due for American Capital.

24, we just want to reiterate that we're charged by our Board of Directors to buyback $0.5 billion worth of stock below... if it indeed trades at opportunistic prices below our net asset value. And we just described the terms under which will do that.

And we'd point out the bottom here that we had a very brief two-day window between the time we made our announcement and we had to give, as a BDC we have to give our shareholders, actually, a letter to the effect and then we have to wait till they digested it. So, we had only two days between that letter being digested and entering back into a trading blackout. And during the period we did buy $6 million worth of American Capital stock. And I apologize for the fire engine below, but we are in ice storm in the area and lot of accidents down the road here in Bathesda. I generally would like that fire line to come to highlight a certain point, but little better timing than I have, I guess.

We are not going to go through the new investments, the $7.9 billion that we made in 07 over the $1.9 billion that we made in the fourth quarter. The only point I will highlight there is we... those new investments, almost none of it went into stressed companies, $29 million for the whole year in nine distressed portfolio companies, $4 million for the fourth quarter into five distressed portfolio companies. Very proud about that, that just is great indication of the quality of the portfolio and how it's performing in the...

You can see on slide 28 that our pricing is, indeed, widening as we discussed kind of a lot over the last ten years that, in troubled times spreads widened, and that's great for American Capital. And you can see that happening with senior debt widening about 600 or 60 basis points. But that's in the context of LIBOR also widening out by about 80 basis point. So, you add the two together we got about another 1.5 spread there, and sub-debt widened out 1%, and now, by the way, I am comparing the yellow bars is the 12 months ending the end of the second quarter, and the green bar is the second half of 2007. And just to remind you, we invested in that period, I don't know, about $3.5 billion, about 35% of our portfolio got reinvested in that period of time. So we can move very quickly to adjust to a widening spread environment and on the sub-debt not only was there 1% increase in our pricing, but you see about a 70 basis points increase in LIBOR during that period or spread increasing for LIBOR.

Moving on to slide 29, we not only do we have control over about half of our assets, but we are in a position to fund the senior debt of transactions and so when we make investments we can do our one-stop buy on transactions. But when we sell a company, if necessary, the seller is interested in our financing and we would often love to finance the senior debt and sub-debt in selling the company. We can turnaround and syndicate it and we had a record breaking levels of syndications in 07, record breaking levels in the second half of 07.

So all those stories that you read about in the papers where the buyout business is dead, because you can't syndicate senior, remember they are referencing $1 billion plus deals. We don't do $1 billion plus deals. we are in a middle market and the middle market still is very thriving, very active and where we can continue to be one of the most active buyers and sellers in the middle market, in part because of all the capabilities that we have, our one-stop buyout capability and our syndications capability. So we have a great syndications team in New York a, 10% team, and they have made all this happen.

And by the way the reason that we can syndicate and another firms can't, is because we have the scan gain. So when we go and do a one-stop buyout and we syndicate the senior, the buyers of that know that we have the sub-debt and equity underneath us, we have to fight like crazy on their behalf otherwise our sub-debt and equity is worthless. And so we make the perfect firm to be selling senior paper.

Slide 30, just points out that we have now exceeded $10 billion with revolving investments we have made since our IPO, that's 44% of our total. And our valuations, gosh, there has been a lot of criticism of our valuations over the last three and six months. But, golly, they still... our exits, this $10 billion of exits still come within 1% of the prior quarter's valuation. I am not sure there is any other firm that could give that statistic.

The nice part about this statistic is that on our exits, overall on all of our assets we had a 16% return and remember three quarters of our assets are sub-debt and senior debt investments, in fact a third of our assets are senior debt. And if you just look at our equity-only exits we had 30% IRR.

Let's get now to our funds under management, and you can see on the chart 32, we have five funds under management and we have a whole bunch of it that we are working on that are in development, a variety of business lines that we hope some day to create fund, to manage and we are working on it hard. We have about 20 people in department that makes all of this happen.

Slide 33, shows that we have increased our assets 51% in '07, but our externally managed funds we increased to 98% in '07, and you can see two years ago we had no funds under management... extremely managed funds.

Now let's go to our 2008 forecast. We are forecasting that even through recession, we will be paying out $4.19 in dividends for the year and almost half is forecast to be paid from 2007 taxable income. We are also trying to make it as clear as a bell that our... we forecast our realized earnings in '08 will exceed our dividend, and we are giving guidance that in the first quarter we're... we expected $0.73 to $0.78 in net operating income on a diluted basis. And we are also trying to be, clear as a bell as well, that 2008 net taxable long-term capital gains will exceed our 2007 net taxable long-term capital gains. And that '08 net taxable long-term capital gains, all of will, will be... is being forecast to be rolled over into 2009 to pay the 2009 dividends.

We're also forecasting that '08 ordinary taxable income will exceed '07, and that $500 million... that we're forecasting $500 million of ordinary taxable income to be rolled over into '09 and that comparing to the $361 million rollover from '07 to '08. Is that $500 million with capital gains, as well? Yes. That, we're going to have to fix that slide, because it's not correct, the $500 million is both ordinary taxable income and long-term capital gains that we're forecasting to rollover into '09. And actually, we expect it to exceed the $500 million.

Slide 36 is even though our portfolio is performing well, we are assuming a recession occurs in '08. Now, we're not seeing that recession in our portfolio today. The latest statistics that we have is that EBITDA... revenues are up in the aggregate on our portfolio leased companies that are reported to us through December, up about 3% and EBITDA is up in December, I think, about 2.3% or so. So, we're not seeing a recession, but nonetheless, we're assuming it's going to happen. And therefore, we're prepared to operate in a steady state mode, and that means we're prepared to operate without raising capital at American Capital in '08.

Now, we do expect to generate significant internal liquidity that will be available for new investments and we think that amount of liquidity will exceed the capital base of virtually all of the competitors that we compete with. So, with a portfolio of the size of ours and with as much liquidity and control that we have, we expect lots of liquidity to invest in new companies, wider spreads and with less competition.

We're also forecasting that our asset under management will increase from $7 billion to $14 billion, but again our assets on our balance sheet remaining at around $12 billion. Now, of course, that can change if we start trading nicely and evenly and significantly above book value.

If you go to slide 37, we also want to point out that there is considerable upside to all this. In that, if we are able to raise more balance sheet equity or raise more funds under management.

So, we want to talk about our credit quality quickly here. First off all, you can see in the fourth quarter, we looked at 921 investment opportunities, and that compares favorably to the fourth quarter of '06; it's a little down. And it's significantly down from the highs of Q1 and Q2 of '07, and it will probably be some time before we see highs of that sort again. But still... there is still very substantial volumes out there.

We closed only about 2% for the quarter; and on a trailing 12 months basis, 1.7%. As I mentioned to many folks in the past, historically that's been probably a little above 2%. So, we are turning down more of what we see. And you can particularly see this in slide 40 where, of our 22 top competitors that did 244 investments last year, we only saw 21% of them, which is... tells you how fragmented this industry is. And we passed on 92% of those.

So, by the way, since we are one-stop buyout firm, we could have bought and did 52 additional transactions. We have the check book, we could have written it, we could have done those transactions in '07, if we wanted to, but we did pass on them. Not to say these were bad transactions. It's true, we did not submit... even a little ball bid on them, but there could be very good reasons why these are the firms. These are outstanding firms. These are the 22 firms, and there could be very good reasons why they did those 52 investments.

But we didn't feel that they were right for us. We did bid on four of them, 8% of the total, and of course, by definition, we lost those bids. And because we were maintaining our discipline. So this chart better point out that we continued to maintain discipline in this marketplace. We're not going to discuss slide 41, but skipping to slide 43, where we show our past due in non-accrual loans. And in the fourth quarter on a face-value basis they rose to 7.9% from 5.5%. Not to dissimilar for... to the second quarter or first quarter, it looks like of '06, and I point out that this statistics of face-value is not a statistic that you should pay, in my view, a lot of attention to, because keep in mind we've depreciated a lot of these past... a lot of the non-accrual loans.

And then, of course, a lot of the past due we ultimately collect. But we've depreciated quite a large portion, you can actually see how much on the prior slide, the $132 million of non-accruing... I'm sorry the $338 million of non-accruing loans in the fourth quarter has been depreciated down to $122 million. And so that's already gone through our books. You've already recognized it. If you pay attention to NAV, that's already in there. If you are looking at our earnings, it's already there. And so the real statistics when you take... when you think of those other things is our 2.1% statistic and you can see that's been running at a very low level and 2.1 continued to be a very low level of past due in non-accruing loans at fair value to our total loans at fair value.

Turning to slide 45, everything I have discussed this morning is all due to the performance of our assets. And we have 700, I think, of some of the finest investors in the middle market, private equity and mezzanine in the world. And the reason I can say that, the reason I can say they are some of the best in the world is because the statistics is telling us exactly that. If you look over the right side, over ten years our total assets produced to 60% IRR on a pre-levered basis. Our equity-only investments produced a 28% IRR. Over the last five years the numbers are 20% and 32%.

These would put us in the top 15 percentile of private equity. But the consistency of performance, I think, probably puts us in the top 5 percentile. And you can see that we only had one year where our equity had a negative return and in that year our total assets still produced a 9% IRR. So, we are very pleased. We added a table at the bottom of this chart to show you how much assets at fair value remains in each of these static pools, and you can see for the first five years of our investing, we have very little left of those investments. And so those pools have performed, and we are very proud of them.

And let's move on to slide 46, the reason it is with that performance, is the reason why we have performed so well relative to the S&P 500, which you can see there in blue, and in gold is the American Capital total return versus the S&P 500. And through December 31st, we've produced over ten years, an 18% return versus the S&P's 7%. And I'd like to point out that we traded below book back in 1998, and the next year we delivered a 44% total return. And then we traded below book, again, in 2002 and the next year we delivered a 53% return. And then in 07 we traded below book for the third time in our history, and already we are 11% above the S&P for total return.

So, if you go to slide 47 you could see that this quite a unique time in our history where we are trading at such a low price to book. You can see the history of that and we think it's a great investment opportunity. And so slide 48, just to point out, that with 11% dividend yield and 13% growth rate, which we have... remember that, that's the growth rate to the dividend. And we've already told you that we have almost two quarters of that dividend already banked with taxable income that we have rolled over from 07 into '08. And so if we trade at the same 11% yield as we are today. If we trade at that level toward [ph] the end of the year we will have provided you a 24% return.

If we trade down to our average 8.5% dividend yield, over the last ten years, we'll deliver about a 55% return on next two years.

So we want to just summarize real quickly here and open it to questions. We forecasting 419 in our dividends, 13% growth rate and that's assuming that we will be in a steady state mode. We are forecasting $500 million rollover of our 2008 taxable income into 09, capital market conditions we think are outstanding because there is fewer competitors, this credit conscious just going to give us wider spread to invest in. That would... should allows to increase our NOI in dividends. Commercial credit remains... in spite of all that commercial credit remains simply outstanding with very low default rates and this is a great time to have a season portfolio over which we have significant control and where we can generate lots of liquidity. And so it's a great time to be levered less than 101 and we are going to continue to rationalize this industry of investing sub debt in equity into another market.

And with that let me open up to questions and I hope Ira and John will help me here.

Question And Answer

Operator

Thank you. [Operator Instructions]. And our first question is from Sanjay Sakhrani from KBW.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Hi thank you. Malon I think you mentioned you expect a fair amount of liquidity from your existing portfolio. How much of it is gains and how much of it is just debt reaching maturity?

Malon Wilkus - Chairman, Chief Executive Officer and President

What we referred to is we have a lot of control companies and I think building our models for this year we always look from the bottom up, I mean look at everything that we have in the pipeline for sale I mean you don't decide to sell a company today and install it tomorrow. It's usually a six months process and we actually have a good pipeline as we do in every single year. I mean it's nothing different about this year versus last year, its just that the portfolio is larger and more seasoned which means you get more controlled company at any point in time in terms of dollars up for sale. So I think that we are expecting... a lot of the liquidity is being generated, not only from portfolio companies being sold, but also you take like these two transaction that's another example of how we generate liquidity in the portfolio where you go out and raise a private equity fund and sell a bunch of your investments over that. So, I think its coming from more of those areas than just saying well this company has a loan its going to be due and they are going to pay it off.

Sanjay Sakhrani - Keefe, Bruyette & Woods

You guys are pretty confident that portfolio companies that are in the process of being sold will be sold?

John Erickson - Executive Vice President and Chief Financial Officer

Well keep in mind it takes six months to sell a portfolio company. And so, we are already in a six month phase where we get... we first invite in half a dozen investment banks that give us a sense of value and we narrow it down to one and they do due diligence and then they give us a sense of value, and then we get a couple of dozen bids that give us a sense of value and we narrow that down to six and then down to three then down to two and one and that process takes six months. So you can imagine we have a lot of those processes underway and that's why we can be so confident about our net capital gains for the year exceeding our 07 gains.

Malon Wilkus - Chairman, Chief Executive Officer and President

And I mean we have been doing this now, seven months into the credit crunch. So we've got a good sense we have announced some companies that we sold in the fourth quarter which was really in and midst the credit crunch. The other thing to keep in mind is our one stock capability actually can help us in the sale process because if there are issues and we haven't seen them, but if there are issues in financing and sale, we can finance the sale of some of the assets and keep in mind the private equity firms have raised records amounts of capital over the last three years which they're looking as employing good companies. So we are optimistic about the status of our fund raising and the status of our liquidity coming from selling portfolio companies.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Okay. I got it. And then just a question on ECAS. I know that the quoted mark was lower. But the controlled premium also came down. I mean is there... could you guys give us a sense of sort of what that was at the end of the quarter and was, did the control premium come down because NAV came down there?

John Erickson - Executive Vice President and Chief Financial Officer

We rely on third party reports for controlled premiums.

Malon Wilkus - Chairman, Chief Executive Officer and President

I think one condition you could observe is if you look at some of the peer type companies, where they were trading in September 30th a lot of the companies were claims to book and if you look at where they were trading in December 31st, a lot of companies were around book, a little bit below book which would influence your assessment of controlled premiums. So as the control premium definitely came down...

John Erickson - Executive Vice President and Chief Financial Officer

And by the way there's variety of firms that you can buy the statistics about control premiums and they track that on the annual and quarterly basis and we gather as much of that information as we can to inform us as best we can.

Malon Wilkus - Chairman, Chief Executive Officer and President

We still think it's worth at least NAV but we got to go through evaluation process and in this environment its part of the support in any of these that alone is the only factor when you got peer companies that are trading below book.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Right. Do you guys have a breakout of that or is that going to be in the Q?

Malon Wilkus - Chairman, Chief Executive Officer and President

We don't do the break out in the Q like we did last quarter and give you the amount of the peak times Q and the amount of control premiums we'll give you all those details in the Q.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Got it, alright well thank you very much.

Malon Wilkus - Chairman, Chief Executive Officer and President

And you know I should just point out, one last thing too, is that the European capital fair value as determined by our board directors within range of fair values determined by who will handle or will be hired in Dukane which the board engaged about five years ago to assist them and in valuing our portfolio company.

Sanjay Sakhrani - Keefe, Bruyette & Woods

So you've got that collaborated by third party right, the evaluation of ECAS.

Malon Wilkus - Chairman, Chief Executive Officer and President

Yes.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Okay great, thank you.

Operator

Thank you we've a question from the line of Jim Shanahan from Wachovia, please go ahead.

Jim Shanahan - Wachovia

Good afternoon, thank you for taking my call. I have a couple of rapid fire questions. I just wanted to confirm this number $6 million is all that American Capital has completed in share repurchase related to the $500 million authorization?

Unidentified Company Representative

Yes that was ...

John Erickson - Executive Vice President and Chief Financial Officer

We really had basically two days to that for the time we actually as we've to do mailing to shareholders and that type of thing and we had to close the window for earnings, so unfortunately we're disappointed that when the stock was trading at 26 and 27 we couldn't be a lot more active. We would have loved to be more active. We did indicate we expect to do this over the course of year, so it's not as that you should expect to see us spend that $500 million all in a couple of days.

Jim Shanahan - Wachovia

And what is the remaining dollar value of capacity under existing equity forwards as of December 31st.

Unidentified Company Representative

$150million, $160 million

John Erickson - Executive Vice President and Chief Financial Officer

About a $150 million, $160 million dollars worth.

Jim Shanahan - Wachovia

And one final question please then I will be happy to get back in the queue. You detail debt maturities in 2008 and 2009 on page 23 of your slide presentation. Am I correct in assuming that these represent management's expectations for pay downs under the American Capital business loan trust that were issued in '04 and '05?

John Erickson - Executive Vice President and Chief Financial Officer

Yes.

Jim Shanahan - Wachovia

Okay. Thank you.

Operator

Thank you. We have a question from line of Vernon Plack from BB&T Capital Markets. Please go ahead.

Vernon Plack - BB&T Capital Markets

Thanks very much, John I wanted to get a sense for your thoughts on your net operating income forecast which is roughly $0.15 below the fourth quarter and trying to discover what the drivers are there, is the reduction due... is that primarily from income?

John Erickson - Executive Vice President and Chief Financial Officer

Yes, certainly fee income is a component of that, also the first quarter is almost always historically low, I mean the first quarter is when our annual salary increases which has an impact, the volumes of the fee incomes are lower, so that was all playing into that input, you will just see historically the first quarter is typically a low quarter for us.

Vernon Plack - BB&T Capital Markets

Right and with that it's a little maybe a little challenging to see that number ramp back up, I know you are not giving any more than a quarterly forecast, but I suspect we will see that number creep up throughout the year.

John Erickson - Executive Vice President and Chief Financial Officer

You could very well say creep up and remember as we talk about USD hopefully widening spreads in this environment. I think if you look for example, why would it move significantly from June 30 to December 31, its moved some since than which certainly will impact our quality of funding A lot of that... certainly a lot of the mezzanine loans that we do our fixed rate loans and then you've got LIBOR declining which would either being positive from a spread standpoint.

Then also there will be some lumpiness based on the asset management business and the timing of getting different incentive fees will get the asset management business, you could assume that there will be some growth. As we forecasted in the asset management business which will also help drive NOI and in a steady state mode. In the past we've always been hiring throughout the year which effectively served as a drag on NOI. You could assume you won't be dealing much of that this year. So even that will end up having a positive impact throughout the year.

Malon Wilkus - Chairman, Chief Executive Officer and President

By the way you see on slide 84, I just counted it for the last five years, first quarters were below the fourth quarters NOI. So it's always being typically a seasonally lower quarter.

Vernon Plack - BB&T Capital Markets

Okay, thank you.

Malon Wilkus - Chairman, Chief Executive Officer and President

You are welcome.

Operator

Thank you. We have question from the line of Carl Drake with SunTrust Robinson Humphrey. Please go ahead.

Carl Drake - SunTrust Robinson Humphrey

Good afternoon. Question on how your portfolio mix might change embedded in your recession assumptions. Should we expect perhaps that you might decrease the equity rating in the portfolio and move up... I believe you had done that in the past if we are in recession. Is that something we might expect?

Unidentified Company Representative

Yes, we would expect the portfolio during the course of '08 to migrate a little bit more toward debt assets and a little bit less toward the equity assets. So we would take advantage of the widening spread in the mezzanine market and put that money to work in that market where all the opportunities that we can find that meet our quality standard

John Erickson - Executive Vice President and Chief Financial Officer

And also take advantage of our ability to continue rating some equity bonds which would be... effectively having us originating equity transactions, but not placing all that equity on our balance sheet.

Carl Drake - SunTrust Robinson Humphrey

Okay. And you mentioned a few questions ago about some companies for sale. Where are multiples right now? How have they, perhaps contracted from six to nine months ago on private equity multiples? Middle market?

Malon Wilkus - Chairman, Chief Executive Officer and President

What you'reseeing for quality companies is that that multiples are hanging in there, not quite... perhaps not quite as high as at the peak but pretty close for quality companies. So, there is fewer transactions being done in the marketplace, but for good quality companies they are still attracting very good prices.

Carl Drake - SunTrust Robinson Humphrey

So you're still seeing pretty flat multiples not a half return or return lower?

Malon Wilkus - Chairman, Chief Executive Officer and President

Carl, you can look at slide 139, where we show the S&P report on a quarterly basis in '07, compared to prior years, and multiples have come off of the peak of the second, third quarter but they are still quite substantial in the fourth quarter.

John Erickson - Executive Vice President and Chief Financial Officer

Yes, I think we saw the company at fourth quarter rebounded the fourth quarter of '05, I think the multiple was identical with what we had invested at. The multiple we set out that was exactly what we are getting.

Carl Drake - SunTrust Robinson Humphrey

Okay, that's helpful. Last question on...

Malon Wilkus - Chairman, Chief Executive Officer and President

This slide is for companies with EBITDA less than $50 million. And so again what you read about in the papers that values are perhaps coming down and that's always... everything you read about when it comes to private equity or mezzanine you are reading about the $1 billion plus deals and not the middle market. I mean, usually if you are reading about it in the Wall Street journal.

Carl Drake - SunTrust Robinson Humphrey

Obviously, I was looking... I was thinking more prospectively going forward and if you get some companies that are getting bids on, if there were some softness that you are seeing from even the December ended period.

Malon Wilkus - Chairman, Chief Executive Officer and President

Well, John just mentioned that there was record breaking levels of capital raise in this industry and I know we have a chart on that. It was extraordinary levels in the last three years and it wasn't raised just by the big billion dollar plus funds, it was raised by middle market company, middle market private equity as well.

John Erickson - Executive Vice President and Chief Financial Officer

The other point I'll make is our private finance portfolio, had net realized gains and appreciation in the fourth quarter and so in the evaluation process, we have got multiples were down that would have been reflected in there and certainly we do use all of our LOIs and sale data in assessing multiples part of our... one of the input in our evaluation process. So, I think we do have some good things like this all companies are and we're not feeling like the multiples are down significantly at this point.

Carl Drake - SunTrust Robinson Humphrey

Okay and last question on credit quality and the increase in the non-accruals. It looked like there was one big company or pretty sizeable company that was 30 days past due, but I believe there was eight new companies maybe you can discuss overall credit quality if there's any sectors or themes that your seeing that or is that predominantly coming from one big company.

John Erickson - Executive Vice President and Chief Financial Officer

I think Malon had indicated kind of our flat date on our fourth quarter company performance. We actually rolled it forward to January because of a lot of the kind of credit concerns out there or the economic concerns in January. We look at that data again for our top 20 control portfolio companies in January and didn't see any... we didn't see the economy fallen off the cliff. The troubles we've had, had been I think, particularly the new ones have been much more company specific execution than a general theme in the economy. I think we talked about in the third quarter, so the troubles were really related to construction housing industry. I think in the fourth quarter, the new troubles were really much more management company specific, execution performance and not some what we felt like the economy had just completely caught them off guard and I would say that, given our size, you are going to see companies going on and going off of these lists pretty routinely. I would say that, its fair to say there is some companies on that list, in general off of that list today and some new ones that are on that list. We don't think that the percentage of delinquency in non-accruals is at all bad. We are sitting there 4%, we were saying that we felt like that was just extremely good. We think we're within the range of normalcy at this point.

Carl Drake - SunTrust Robinson Humphrey

Okay. Thank you.

Malon Wilkus - Chairman, Chief Executive Officer and President

And, I would just say that the Flash report that for our control companies actually showed very decent increases in revenue and EBITDA for the January quarter.

Carl Drake - SunTrust Robinson Humphrey

[Indiscernible]. That is a one month's results, so we don't want, we didn't want our reporter publish that, because... one month's results could be lumpy, but we were somewhat surprised given the kind of announcement you saw there from ISM and CISCO and unemployment just all of these other factors we were certainly looking to see it things were falling off of the cliff and we had not seen that.

Carl Drake - SunTrust Robinson Humphrey

Yes particularly the leverage loan market.

John Erickson - Executive Vice President and Chief Financial Officer

Yes.

Carl Drake - SunTrust Robinson Humphrey

Okay. Thank you. That's helpful.

Operator

Thank you. We have a question from Greg Mason with Stifel Nicolaus. Please go ahead.

Troy Ward - Stifel Nicolaus

Thank you. This is Troy Ward. Good morning gentlemen. On the NOI quickly, we understand that Q1 is typically seasonal, it got to be lower than Q4. But in Q4, the interest and dividend line of 283 was... beat our estimate by quite a bit I think as it did others. Without maybe the corresponding growth we would have expected to see in the portfolio. Was there a large fee or was there something in that number that was driving that higher?

John Erickson - Executive Vice President and Chief Financial Officer

Yes well I think the one you're seeing as Malon indicated are the ones chart look at the growth and the like the spreads on subordinated debt. So you had like about 90 basis pointy growth and our new investment spread. I don't know how much that was factored, certainly we did have some portfolio companies that were performing well and collected some dividends that type of thing. But in this environment I would hope throughout 08 you actually see the net investment margins expanding as LIBOR declines and we reinvested higher spread. So hopefully that's not a one quarter anomaly but is part of the trend we've talked about that occurs in this kind of environment where if you are going to assume that the equity portfolio slows down in growth you have to make a balancing assumption that this spread on your net interest margin go up.

Troy Ward - Stifel Nicolaus

Great. I guess the differential between Q4 and Q1 guidance just seemed like a lot to us from the fee side, because if you assume it was caused by the spread in Q4. While clearly those assets are going to remain on the balance sheet now for a full quarter plus new assets. So I guess the size difference between Q4 and Q1 guidance at that point would seem to be rather large. If there wasn't special... some higher fees in Q4.

John Erickson - Executive Vice President and Chief Financial Officer

Yes unfortunately I haven't spend a lot time looking at gross models to be able to give you any more color on this. Certainly I think you have time... or someone in the staff can take a look at some models and maybe give you some more insight.

Troy Ward - Stifel Nicolaus

That's fair. And then your guidance on your assets under management of balance sheet went up nicely. Can you give us a hint on kind of what that implies for the public REIT that was filed? What will that add to the AUM here in 08?

John Erickson - Executive Vice President and Chief Financial Officer

Yes you know we have Sam Flax our General Counsel sitting here I think he would tell you obviously for anything that in registration we can't really say anything. So... and with our asset management strategy, it will be safe to assume that at any point in time we have a number of items that are related in capital REIT note [ph] where we really can't make any comments on.

Troy Ward - Stifel Nicolaus

Okay. And quickly on the kind of velocity the portfolio has been a lot of... how much money you are getting back prepayments in that like. It just seems like that's... the portfolio comes back at you a lot quicker than maybe most would anticipate. And you drive some of that. Is there a point where the cost to re-originate and/or sell a transaction is going to be less desirable, because the higher yielding transactions that are coming on the balance sheet, will you see that velocity decrease in the coming year?

John Erickson - Executive Vice President and Chief Financial Officer

No.

Troy Ward - Stifel Nicolaus

It just seems to me as you put new investments on there is an awful lot of expense that goes along with that. And if you are putting them on at a much better spreads your desire to sell them would be less. So maybe not in '08 but at some point in the future would you expect the velocity of your portfolio, the private finance portfolio to slow?

Unidentified Company Representative

I think the velocity in the non-controlled investments is probably going to slow down a little bit compared to where it was in the last couple of years. The control side, we will continue to monetize our capital gains as we take advantage of the marketplace and take advantage of bids that are placed on our assets for us. And keep in mind that a large part of the velocity that you're seeing in there is as successfully syndicating the senior debt and our own buyout. So we have a very good track record of syndicating... successfully syndicating the senior debt in the buyouts that we leave. So there is a significant number in there that's syndicating senior debt we're aware out of the paper at a very short period of time, post closing.

Troy Ward - Stifel Nicolaus

All right, okay. And then one final. On slide 15, Malon you've always pointed to and we have agreed that the differential between where you have it an exit, a realized exit in your last quarterly mark or within 1%. But it seems like this quarter where you had $59 million of reversal of prior appreciation with $41 million gain. Can you just speak to kind of the differential in this quarter?

Malon Wilkus - Chairman, Chief Executive Officer and President

We will have a press release giving the details on our exits, I think in the next couple of days. And what you'll see there is my recollection of it is that there is one where we have... we were about $5 million off in one direction and another in the same quarter where we were 5 million off in the opposite direction. And I can't recall the other amounts. So I don't have an answer for you. I do know if we still have that... the same... on a trail. Since we are still at 1% over the course this, then it's an analysis over $10 billion.

John Erickson - Executive Vice President and Chief Financial Officer

It ultimately two.

Malon Wilkus - Chairman, Chief Executive Officer and President

Oh it takes two.

John Erickson - Executive Vice President and Chief Financial Officer

Yes.

Troy Ward - Stifel Nicolaus

I am sorry, I didn't get you. John what was that?

Malon Wilkus - Chairman, Chief Executive Officer and President

Oh I see, it was... when we sold our equity stakes to American Capital Equity too... Rich you might go ahead and describe that please.

Unidentified Company Representative

I think the value... the proceeds that we got from these sales is to were certainly below than what we had valued and that is 100% the 39 [ph]. In a percentage wise when you look at the size of the transaction it was large. The variance was probably large.

Troy Ward - Stifel Nicolaus

And the balance of that value goes to the end part of the management company. So in terms of the fair value that they paid at the end of the second quarter, the way the accounting treatment before this, it was divided between the asset management agreement that we received and the proceeds in the sell of the individual assets that we receive. And so you'd have to lump in... you are missing. It's a $80 million number on a very big, I didn't realize that the H2 was in there.

Unidentified Company Representative

That's right. So H2 would be in there and that will show up in the depreciation that you saw on American Capital LC. There would have been some.

John Erickson - Executive Vice President and Chief Financial Officer

Dollar variance was large but percentage variance we look at the size of the exit related to H2 as a percentage variance very small.

Troy Ward - Stifel Nicolaus

We can go through it time of offline. That's fine. Thanks guys.

John Erickson - Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. We have a question from the line of Bob Napoli with Piper Jaffray. Please go ahead.

Robert Napoli - Piper Jaffray

Thank you good afternoon. The question I guess on the growth and how the... who will handle? How they review these? Your investment... your new investments that you made last year which arguably would be the peak of the market. You made I think about $7 billion in new investments and a half year investment portfolio were the 07 investments. I've been involved in this sector for 20 years and if you look at the chart on page 139 that you lay out, I've seen this chart going back, way back and what you see in 2007 now that is the peak of the cycle that's what it looks like and if you look at over 20 years and its going to go back down from valuation they are going clearly going to go back down. Overall and I just wondered I mean my concern and I think you guys have a very good back office and do very good due diligence etcetera, but you could sell fast at the peak and the evaluations you are carrying on the investments from '07 they are clearly in the market for those types of investments are going to decline. I just wondered how you were going to review that with... when does... is it a whole year before who would handle it, looks like those investments in comparison to the market and investments at large.

Unidentified Company Representative

Bob, if you look on slide 45 you are going to actually see the specific statistic that the 2007 portfolio represents 41% of our total asset of share value today. Half of that was originated since the credit crunch. So in the second half of the year therefore only so in the category that you were saying is the peak it was a 20% of our total assets of share value.

Robert Napoli - Piper Jaffray

Well, the whole year I would... of the '07 I would view as the peak would, probably the peak of the peak being the second and third quarters I guess?

Malon Wilkus - Chairman, Chief Executive Officer and President

I don't see how, why you would say that. The credit crunch... due to the credit crunch... the credit crunch really started in '06. We saw a developing throughout the... in variety of sectors in 06 and then early 07. And basically all large transactions came to a screeching whole by June 30th. So I don't know what you would say that the peak extended into 07 so in the second half of 07.

Now it is true the multiples continue stay high and that of course continuing to butters the evaluation of our investments and we think that there's a good reason if you look on the Slide 137 there is so much capital raised by private equity and you don't... don't forget that a lot of $1 billion plus... the firms that we're doing $1 billion plus deals will come down into the middle market to do transactions which will continue to create great demand for middle market companies and strategic buyers still are flush with cash and are quite exquisite right now. Plus interest rates are coming down making it cheaper to buy in the middle markets. None of this works for the $1 billion plus deals that everything I'm saying works in the middle market and continues to do so.

John Erickson - Executive Vice President and Chief Financial Officer

I mean if your thesis were right you would take a investment we made in the second quarter of this year and a strategic buyer has already made an announcement that they are buying that asset from us seven months later. I think that that makes an important statement both into our... the quality of our assessment of the companies we buy but also to market conditions.

Unidentified Company Representative

We just did a analysis a correlation with... we are always trying to do correlations between variety of statistics and what results in great IRRs and returns on our investments. And so we have a whole team of people they've been working on correlations for us and one of the correlations with we've tried to review was to purchase price purchase price multiples and we did a whole correlation study of it and there is no correlation. We couldn't find a correlation between purchase price multiples and IRRs on the equity investments. Very interesting, I think, none of us had a predisposition to what that analysis would tell us, but it turned out that there was no correlation and that's just means that there is a highly efficient market out there, where high growth companies, they go for high multiples but go for high... people pay high multiple for them and still get good returns. Lower growth companies get lower multiples for it but there the pricing is adjusted with the multiple and both on the entry and the exit.

Robert Napoli - Piper Jaffray

I understand that but I think you would suggest that all of the companies down in the Q2 and Q3 of '07 were the S&P shows, here the multiple was just about 10 times great companies and I mean I am sure there are some great companies out there but I doubt if there are all great companies.

Unidentified Company Representative

Well keep it that's the other point. If you look at our... the degree to which we throwaway deals, we have, I think undisputedly, the largest deal stream in the world, in middle markets in the United States and North America. We have perhaps the second or third largest in Europe, but in the United States we have the largest and it is by far and the reason we have that large deal stream so we can throw away the 98%, 99% of what we see, and skip... and only pick the best ones, since we are the biggest firm out there with the greatest capability that we can fund in dollars, sterling and in Euros and in Canadian dollars. We can do due diligence in North America and in Europe. We can do outsourcing in China because of all these features we get the best deals. We guess we are able to cherry pick the very best out there.

We tend to get the first call and because of our one stop buyouts we get the first call and we get the last call. If the deal starts to cater for some other buyer, we get the next call. We get the cream of the crop and that was not true when we were a younger firm, six to seven years ago. But it is very much the case today. We have noticed that a lot of analysts don't... just do not give us much credit for being vastly bigger than most BDCs out there. But the typical BDC is the tiny little finance company. They... this is the tough stuff and this has been a very tough environment sort of... for the tiny little finance company. And for us, this is a great environment for us. We get the cream of the crop.

John Erickson - Executive Vice President and Chief Financial Officer

Another thing to remember these multiples are nothing but averages and throughout that. So a company was selling in the second quarter of 2007 for 8.5 times versus the company was selling for 11 times. It's very probable that, that company that sold at 8.5 times is much more cyclical and has much more correlation to the economy and you could see that company trading for five times all that company that was 11 times and viewed as not being cyclical and having good growth prospects may stay at 11 times through the cycle. And so it's difficult to take those averages and draw conclusions you really have to get down to the different companies and through the cycle we saw a lot of cyclical companies being packaged and sold as growth companies and we hope we have done the right job of sorting through those and avoiding those and those are the ones that are having the largest amount of multiple contraction through a recessionary economic cycle and we saw that in 2001, there was a lot of company you could buy for 5 times and they were all cyclical.

Unidentified Company Representative

Take the chart was on the 150 or the next chart where we looked at the 22 top competitors and passed on 92, we passed on... we saw a 21% of the 244 deals that they did, we didn't even submit a low, Bob bid of 92% of that 52. Now why, you got to ask yourself, why didn't we do that? Well these are good firms, they are doing good deals, they have raised capital many times. But yet we still didn't, the deals that they were doing didn't passed our muster. So look, we just... we do huge volume and everyone thinks because we doing volume, we must somehow drop our discipline. But the fact of the matter is we do huge volume, because we are a huge company. The top 22 here my guess is at, Ira, what do you think the average size of these 22 companies?

Unidentified Company Representative

There are probably 20 to 40 people in the firm, total something like that. That's the typical private equity firms those a couple of deals a year at most so, you know...

Unidentified Company Representative

We see firms, the bigger ones. So they probably have done 10 or 15 deals in a year.

Robert Napoli - Piper Jaffray

Let me ask a question then just on...

: The reason we do such a huge volume, is because we are a huge firm. We got it just for the fact of size and we only have 3.5% market share. I think the right statistic is 2.5%.

Unidentified Company Representative

The other thing I think very important as you look at quality portfolio companies just look at the average EBITDA margins. And since the last cycle we have been investing in companies that have 20% plus average EBITDA margins versus in the last year going into 2001 we were in high single digits or somewhere between 8% and 11% EBITDA margins. That is an important factor to look at when you are assessing multiples and assessing comparative companies and you want to understand really where is the quality of the portfolio.

Robert Napoli - Piper Jaffray

Let me ask this question then if you take that into the growth into account with the delinquencies, the non-accruals which at 7.9%, likely your outlook on that since, I mean you are not seeing recession within your portfolio. But that 7.9% at cost is the highest level you've had since 2003. And it's moved up over the last couple of quarters. I would like to know if that's come from. What's types if it's come from 07 portfolio companies? And where you see the non-accruals going from... and so far in 2008 in your outlook?

Unidentified Company Representative

Well first of all, if you look really for whatever reason I am not sure I can explain it. There actually has been a little bit of seasonality to it. If you look over the last three years I think the fourth quarter has been a high point in terms of, there has been little bit of a spike. And so the 7.9 is not really, materially different than what it's been in some of these other fourth quarter periods. I think that we said all along 4% was extremely low. We don't have a recession. I don't think 7% and 8% is outside of what we would consider normal.

Certainly in recessionary times you might see 15% if our product history was indicative of a recessionary period. So I think that we are not at all concerned or uncomfortable about where we are. We did like I previously said we did say in the third quarter it was more construction housing-related and those were here some of the factors for the third quarter and the fourth quarter was more company specific performance. And there is nothing in it I think anything specific about static pools they are much more just company specific execution issues that we saw on some of the things in the fourth quarter.

Robert Napoli - Piper Jaffray

Okay. Thank you.

Unidentified Company Representative

You are welcome.

Operator

Thank you. We have a question from line of Jim Ballan with Bear Stearns. Please go ahead.

Jim Ballan - Bear Stearns

Thanks a lot. Can you hear me?

Unidentified Company Representative

Yes.

Jim Ballan - Bear Stearns

Okay, good. I just... just one question I have got to ask which is, can you talk about the change in the competitive environment for third party funds, for private third party funds for your asset management funds. How has that changed in the last year, and how do you see that for 2008?

Unidentified Company Representative

The change of competitive environment?

Unidentified Company Representative

He means to raise third party funds.

Jim Ballan - Bear Stearns

Yes. I am sorry.

Unidentified Company Representative

The competition to raise such funds?

Jim Ballan - Bear Stearns

Yes.

Unidentified Company Representative

Well look there is a thousand private equity funds in the middle market. Literally a thousand private equity and mezzanine funds in the middle market. So... and since we are the biggest one in the middle market, and with perhaps one of the finest of all track records, you can assume its going to be easier for us than anybody else.

Unidentified Company Representative

Well I would say that unfortunately Tom Michele [ph] is traveling. He is out in a hotel in Middle East and can't be on the call. I think that... we think that from a fund standpoint investors are actually looking for institutions. I think one of themes that he has heard in a number of his meetings is look if you want to get away from having a thousand private equity relationships. And one of the things that are appealing to the funds is the broad institutional approach of the fact that we can operate a wide range of products. And that they can have really one relationship and one gatekeeper. And not have always multiple; you know there are a bunch of little of funds.

Unidentified Company Representative

It's actually a better environment for us. It usually takes nine months to a year for a middle market private equity fund to raise the funds on. And as you can see, our American Capital Equity Two and our American Capital Equity One both took five months to rate. And... I don't think there is really any change in competitive environment. In fact I do feel like we are a huge, very successful and with a great track record. And for us, it's going to be very easy for us to raise third party capital.

Jim Ballan - Bear Stearns

Okay, great. Thanks Mark.

Operator

Thank you. We have a question from the line of Dan Furtado with Jefferies. Please go ahead.

Dan Furtado - Jefferies & Co.

Good afternoon and thank you for your time. I just wanted to try to get an idea of how you determine what's the best price to raise equity or multiple to book is. I guess, what I'm trying to figure out is with the opportunities that are out there do you see book value as a good price to raise or you are going to use internal liquidity and wait till like one-two or one-three of book value?

Unidentified Company Representative

We always the highest multiple is the best price. You can go back fortunately we've got 30 capital rates that you can go back and look at. I do think if you go back to last recessionary environment, we did raise some capital in a March premium the book because those are less compelling opportunities. The flipside is when we are trading significantly below book is the same compelling opportunity to buy the stock, I think you can assume that our appetite for buying the stock will be sense of the stock price just like our appetite for issuing the stock.

Dan Furtado - Jefferies & Co.

Understood, I just thought that with the excess liquidity which you have now you maybe more willing to hold out a little bit longer but I guess --

Unidentified Company Representative

You know one thing I must say, we know that there is for years been this belief by some that we could not operate in a steady state environment, despite all, we would do our best to refuse that and why that's just simply not true and we have shown scenarios and numbers and everything else and yet that still lingers as a concern. And so we are not going to be a... we don't have our finger on the trigger to raise capital. We do believe there is tremendous opportunities right now, you saw... I am sure my quote in the earnings release were conveying that we are seeing some of the finest opportunities I have ever seen and it would be fantastic to have the capital to go after all of the very best of.

Unidentified Company Representative

This is the environment, where the one stop buyer has the most value I mean, you can absolutely buy companies in this environment where you are quoting a one stop buy-out and something less maybe than the top bidder, when we get data, we get, we know that's going to be the case.

Unidentified Company Representative

So, we... on the other hand, the spike effect that we would like to have, we do have huge amount of capital just coming back to us we would keep everybody very busy making new investments. But we're not going to necessarily just kick our capital, raise capital the moment we have the possibility of doing it. But we'll have to see, we'll be judging that on a day by day basis but just remind you our average issuance was at 1.5 times book and we've done it 30 times in the last ten years.

Dan Furtado - Jefferies & Co.

Which is kind of the point, because I figured with the liquidity that you are affording now I mean you can be more selective and then just really drive returns that way but I'm just trying to get an idea how you look at the environment now if its worth to go little bit close to book which... don't get me wrong a lot of players in this space would love to be able to raise capital at book. If the investments are that compelling at this point right now its way to one two or so and then it starts to get more compelling.

Unidentified Company Representative

But just to remind you a 1000 firms... for 35 years a 1000 firms that only raise capital in that book, including the likes of KKR, Bane and Thomas Lee. But in the middle market a 1000 of them have only raised a book they've never raised once at a premium to book and we've done it 30 times, and that's who we compete with.

Dan Furtado - Jefferies & Co.

Understood. And then --

Unidentified Company Representative

If we do an appraising capital 1.1 times book that's already except sizable advantage over the competition and then if we're doing it in the environment where opportunities with wonderful spread the risk returns are just simply phenomenal, it makes a lot of sense to do so.

Dan Furtado - Jefferies & Co.

Understand perfectly. And then just kind of slightly modeling question here about what percent of the current equity portfolio are results have debt conversions? Is that a meaningful amount or not, necessarily?

Unidentified Company Representative

Rich is saying its, pretty small for fair value.

Unidentified Company Representative

[Indiscernible] but he will disclose that I'll let in the K and we get all that detail there.

Unidentified Company Representative

Yes.

Unidentified Company Representative

So, a bit not much.

Dan Furtado - Jefferies & Co.

Perfect. And then finally... I know this that the asset management advisory fees performed very well this quarter. And they've seen to spike in the June and December quarters, is that something that you anticipate going forward or are those just anomalies or how should we look at this kind of the harder to model portion?

: I think as we grow the asset management platform, you will see, when you have an incentive fee component its not always moved and hopefully the model...

Unidentified Company Representative

We also had that one feature of ECAS full year and a one time event.

Unidentified Company Representative

What I was going to say that overtime you will see that with incentive fees if you got 20 funds under management, that hopeful you really don't see, the kind of spiking because you are giving, you might get an incentive fee from this fund in this quarter. This fund in the next quarter, whatever, as we grow that business, you might not see that kind of spiking but for right now it's safe to assume that we have got incentive fees it will come in and go out and that type of thing.

Dan Furtado - Jefferies & Co.

So I guess out of that $77 million was there a significant portion that was onetime. Again so that I kind of understand how to model this on a go forward basis?

: I think that is $2 million, that the one time.

Dan Furtado - Jefferies & Co.

Okay perfect. Thank you very much for your time.

Unidentified Company Representative

You're welcome Dan.

Operator

: Thank you. We have a question from the line of Ajay Jain with UBS. Please go ahead.

Ajay Jain - UBS

Hi, thanks for taking my question. It doesn't look like you provided any of the guidance for this year and I believe you are getting this quarter, if I am not mistaking you, you have got to start to comply with FAS 157. And I am just wondering if you can give an specificity on that that at all in terms of new implications from that change and how you determine their value for the assets?

John Erickson - Executive Vice President and Chief Financial Officer

Yeah, and certainly the reason we did supply any guidance because of FAS 157. We need to complete that process before we can go back out and do any guidance. So after the first quarter, I would expect that it's more likely will to do NAV guidance. We have not completed our FAS 157 work. We are going to... we are working on some valuation models that we will be sharing was the... we need to finish that process before we know what the actual impacts will be. It's safe to say that on non-control investments we are looking at a variety of different valuation methodologies, including... looking at more as a trading security and a bond-yield announces versus just the pure waterfall approach. So we have not quantified all of that at this point in time.

Ajay Jain - UBS

Okay. And just as a related question; does the entire portfolio have to conform to these new valuation guidelines beginning in Q1 including all of the third-party investments and the funds that are managed under American Capital, LLC.

John Erickson - Executive Vice President and Chief Financial Officer

Yes, I mean FAS 157 applies to everything.

Ajay Jain - UBS

Okay. And just lastly, I know you mentioned that EKAS is continuing to perform well overall. And I think you talked about the controlled premium already quite a bit on the call. But are there any implications for the controlled premium based on FAS 157? Presumably, you are still permitted to apply a controlled premium and use some discretion on how that's applied or is that not the case?

John Erickson - Executive Vice President and Chief Financial Officer

We still believe that you can't, but obviously it's part of our first quarter research work. I mean we are going to continue to check that and suffice to say, we are comfortable even checking with the commission. We are going to send them a letter and review with them before... we don't want do something that is not viewed as correct. We think that both the 40 act provides guidance along that line in addition to what we have discussed with those in line people on the FAS committees that we are going to... we will send a letter to the commission and reveal with them and give their concurrence hopefully and then if not then, we will have a clear answer any of that.

Ajay Jain - UBS

Okay, great. Thank you very much.

Malon Wilkus - Chairman, Chief Executive Officer and President

You are welcome.

Operator

Thank you. We have question from line of John Sylmar [ph] from FBR Capital Markets. Please go ahead.

Unidentified Analyst

Thank you. Good afternoon gentleman. Thank you for allowing me to ask my question. The first is probably a revisit, but I think what Sanjay had a question on. And that is in the earnings release, it says you have $361 million of carryover into 08, but you believe the carryover into 2009 is $500 million, which was about $139 million more that is implied in 2008. What are some other drivers of that difference?

John Erickson - Executive Vice President and Chief Financial Officer

Its growth in ordinary taxable income and realized gains over the dividend amount. And we are saying that we hope it's more than $500 million. It's really the fact that when you look at what we are anticipating for realized gains and board any taxable income that it's growing from where we are this year.

Malon Wilkus - Chairman, Chief Executive Officer and President

The ordinary taxable income is a fairly driven. So, substantially by how much assets we had at the beginning of 06 and accumulated in 07 and then how much we are beginning with in 07, and so that... that's pretty straightforward. The net capital gains is certainly more difficult to evaluate, but like I said, we have the process of selling if company takes a long time and you get a lot of insight as you are doing that.

Unidentified Analyst

I guess...

Malon Wilkus - Chairman, Chief Executive Officer and President

See it profitably as it's happening and the value that it happens up.

Unidentified Analyst

I guess the point of my question was: is it your confidence in the control companies and the value of the... of those exits that may occur in 2008 that is driving that the bulk of that difference?

Unidentified Company Representative

I mean that's just more...

Malon Wilkus - Chairman, Chief Executive Officer and President

No, I would say the biggest is probably net operating income, and ordinary taxable income just being higher, just because we have more assets, more earnings assets, simple as that.

Unidentified Analyst

Okay. And the second question I have is just regarding, obviously the middle market turmoil... out of the turmoil and sort of larger transactions hasn't necessarily spread to the middle market for say. But in terms of the one-stop buyout and your ability to re-syndicate the senior piece of that one-stop buyout, can you talk to me about that part of the market as we've certainly seen liquidity dry up sort of across the board? What is your view of continuing to be able to do at that, because in one way one could look at it as that's the exit of the... that is sort of the exit of what allows you to execute on your competency of the one-stop buyout?

Malon Wilkus - Chairman, Chief Executive Officer and President

Sure. As I said earlier, we had been extremely successful in syndicating senior debt and went some buyouts. And we've been able to do that right through... right up to the current day, and we expect that we are going to continue to able to do that even though there are probably fewer participants even in the middle market than there used to be, but there are still plenty of participants in buying senior debt in the middle market that were going to be able to be continue to be successful doing that. So it's not that there hasn't been any fall out in the middle markets from the overall leveraged finance conditions, but less so to the middle market and there still are more than enough players that are still participating in middle market LBOs to be able to continue to successfully syndicate the first lean debt in our transactions.

Unidentified Analyst

And then finally, as we talked about spreads ended up themselves widening on current transactions relative to ones that we done previously to the credit disruption. Can you also talk to me about changes in covenants that you are seeing in the structures of the deals? What specifically those are and what they were previously?

Malon Wilkus - Chairman, Chief Executive Officer and President

Well, if you look at the big transactions, there are a lot of deals that got done back in the 06 or first half of 07 period that were wide on covenants and have big totals and things like that, so virtually all of that has disappeared from the market. Most of that was not in the middle market anyway. So the middle market was the covenants pack didn't really change that much over the period. So a lot of that was a function of the big LBO market and the big transaction. So you saw a lot of covenant like deals in the big ones. So obviously in this kind of environment, we are able to extract a little better covenant package than you might have before. But the middle market is a different animal than the big LBO transactions.

Unidentified Analyst

Okay and I guess, my actual final question is, as we have described the absolute... I would call the difference in dislocation between the larger part of the capital market and the middle market. Why wouldn't you actually move up to larger transaction deal in the fact that if there is as much carnage out there as we are sort of indicating in terms of pricing pressure and sort of dislocation of the deals, why wouldn't ACAS move up to some of those of types of transaction relative to others, that you might self originate?

Malon Wilkus - Chairman, Chief Executive Officer and President

Because our expertise and our organization is set up to cover the mid-market, that's why we have 13 offices around the world. The volume of transactions in the middle market is significantly higher than the volume of transactions that are north of $1 billion and our expertise and whole business and our deal flow and everything we do is geared to do a middle market transactions and so that's our business, that's why we have all these offices and that's why our market coverage and our deal flow is better than anybody else's, because we have built an organization to focus on the middle market.

John Erickson - Executive Vice President and Chief Financial Officer

Also our cost of funding is driven by having a diverse and granular portfolio, and so we wouldn't take our balance sheet and start doing a lot of large multi-portfolios that will end up ultimately driving up our cost account.

Unidentified Analyst

: Fine, thank you for answering my questions.

Malon Wilkus - Chairman, Chief Executive Officer and President

And Erickson [ph] pointed out that we also are restricted as the BDC to concentration limits.

Unidentified Analyst

Okay, thank you guys, I appreciate it.

Malon Wilkus - Chairman, Chief Executive Officer and President

You are quite welcome.

Operator

: Here we have a question from the line of Matthew Howlett with Fox-Pitt Kelton. Please go ahead.

Matthew Howlett - Fox-Pitt Kelton

Thanks for taking my question. Any implications with the ratings and see the new methodology changes that are occurring certainly on the CDO front and then fairly they are going to be their way to other term, securitization of vehicles, any implications on your funding inside ACAS than just in regard to your growth on the external asset management?

John Erickson - Executive Vice President and Chief Financial Officer

Yes, certainly within ACAS, if you look at our 2000-1 business, loan trust, which was our first on balance sheet securitization that had extremely conservative capital structure, and we are quite comfortable using that type of capital structure. And it's not going to suggest that there new methodology would be any worse than, I don't think will ever get close to the loan space and in fact. I don't know what they are contemplating on the CLO side, but CLOs have generally been performing very well. That did... those structure really got out of whack. Certainly in the CMBS side, we've already seen the Moody's rating change the first part of July and that's changed the enhancement of the structure a little bit, which overall has been a positive for us. I don't think the impact is really from a... funding our balance sheet standpoint, the bigger impact will be obviously... is the CDO market when that redevelops were at enhancement levels there that sort of things. But from our perspective, we've always been a secured tight rate investor that didn't mind having skin of the game, but didn't mind having equity in the game. And so we are quite comfortable with changes and enhancement levels, because we like the equity returns in the structured vehicles. I think it's going to be more of an impact to the asset managers that really didn't want to have any capital in the game and I think that will be more difficult in the new environment. I think that was one of the fundamental flaws, where securitization market does. Our track is to allow people to sell off all the credit risk, we fundamentally believe that it is originating underwriter credit should maintain skin of the game and we are quite comfortable doing that.

Matthew Howlett - Fox-Pitt Kelton

Everything I have heard is that these disposition markets are in lock down and mostly perspective to remain that for the foreseeable future. Can you bring a deal... business loan deal today and does your guidance incorporate term securitization markets coming back at some point?

John Erickson - Executive Vice President and Chief Financial Officer

Well, I think we said we weren't raising capital issue. I think one of the big problems of the securitization market; I just went out to the ASF Conference in Las Vegas. There is a huge supply of secondary paper. So if you were going to trying to do a primary issuance, you've got to compete with what in many cases are distressed pricing. I would say that also when you are a AAA buyer and you are seeing some of the AAA paper that you have bought potentially taking losses, that's a very disconcerting situation.

So if win surprise, it may take some time that market to come back and for the confidence of the rating agencies to have to be rebuilt. I would say that it was interesting, I do think there is capital now looking at the secondary purchases, which is probably the first step in rebuilding the market as you've got a clear the inventory off that is out there. And I think that the attractive thing in some of that is inventory as we have talked about it and we've made those purchases are priced at equity like rates or return, which means they are going to attract a different capital base in the traditional AAA buyer.

So from that standpoint I think there is capital coming to the second, you have to start buying some of the secondary paper that is out there, all be it at very wide spread. And it will take a while for the AAA buyer to come back and to regain some confidence in the rating agencies. So that's one of the reason certainly we did build the model assuming no new capital raises. But fortunately for us, that's not our only source of financing if we get the on balance sheet unsecured, but we also have these different fund vehicles we are working with. So we have nicely diversified our capital rising at this point. We are not solely relying on that one market.

Matthew Howlett - Fox-Pitt Kelton

Great. And just going back on the spread point, the CMBS BB, CMBS spreads are out 500 basis points since the end of the quarter. And clearly that was a result in the valuation of your holdings presumably. Have you thought about buying hedging the both by buying protection CMBS or even go into the LCDX and buy credit was up.

John Erickson - Executive Vice President and Chief Financial Officer

Not at all, because you've got to keep in mind this is our unrealized appreciations. I mean all that saying is if that you invest today, you are going to get a higher credit return. I think what we have founded in the collaterals; the collaterals are performing very well. So if this is a temporary valuation mark-to-market, so be it. It's like tank Malon indicated in his opening remarks. We think that the collateral is performing very well as we hold this through the investment period that appreciation is going to come back. So, there is nothing for us to protect, because we are hold to maturing investor. We invest in these securities to own them and hold them and reap the current income coming from them. And so with that kind of a mentality, you don't like saying that the depreciation, but at the end of the day the depreciation if it's because investors return expectations have gone up from the asset class, but not that we are really experiencing more delinquency in losses. Then there is nothing really we feel like we need to protect in that situation.

Malon Wilkus - Chairman, Chief Executive Officer and President

You can see on charts 103, 104, and 105 in our presentation the spread is going up in CMBS that's causing really the depreciation of our existing assets. On the other hand, it also means that new investing in that area is getting fantastic returns from our point of view, the risk reward. And also on slide 103 you can see that the... we have invested, I don't know how much, probably about 350 million in CMBS. It's backed by $100 billion of assets and those assets have performed extraordinarily well relative to the other... the other CMBS that exists out there. And you can see that on slide 104. So our assets are performing very well. We couldn't be happier with them. We think they will continue to perform even if we go through a recession. And we are getting great yields on it. And on so we are pleased with it; and we don't have the need to try to hedge anything about it.

Matthew Howlett - Fox-Pitt Kelton

And just in summary, you are willing to accept volatility within the NAV for the returns that you'll get again, your ultimate returns you expect...

Malon Wilkus - Chairman, Chief Executive Officer and President

In the world of private equity. In the world of illiquid assets, that's what we invest in. I know you guys all invest in public assets with tremendous liquidity. We invest and our shareholders are coming to us, because we are one of the few ways in which they can participate in the private finance business, where we are investing in companies with very little liquidity. You don't have that hourly liquidity. You don't come close having daily liquidity. You don't have weekly liquidity. It takes months to sell most of the assets that we invest in. And in that world you will have depreciation. And it just... you hold it through to the right time to sell it. You make them very thoughtful decision about when to sell, and... so that doesn't disturb us at all.

John Erickson - Executive Vice President and Chief Financial Officer

Well, now keep in mind. There is a big difference between realized losses and mark-to-market losses. So if we make an investment, realize a loss. That's not a good thing. So when we buy a CMBS bond, if we buy a BBB that's yielding 14% and we underwrite every piece of collateral within that one. We feel like that we are going to collect our 14% or our ten year holding period. The market later decides that it should be a 20% return revenue, 14 is going into under NOI and paying our dividend every single quarter. And what I care about is the performance the underlying collateral. If I absorb more losses and don't get money, yes that's the situation I care about and I don't want to be depreciating the bond, because the collateral is not performing. The collateral is performing and paying like... paying my interest and repaying my principle over that 10 year life, and I collect my 14% every quarter then the fact that market decided for some period of time is, should be trading at a 20% return rather than 14 doesn't really impact us and doesn't really... it doesn't impact our fully pay dividend, it doesn't impact our financial performance other than the unrealized appreciation, which will come back overtime is that the asset performance. The shorter that bond becomes, the more you collect of the income, and the more the collateral performs, that depreciation will come back.

Matthew Howlett - Fox-Pitt Kelton

Great, great enough. Thank you.

Malon Wilkus - Chairman, Chief Executive Officer and President

Thank you. We are now going to take just one more question and then we will call quit since it has been a long call.

Operator

And your last will go to line of Greg Hillman with First Wilshire Securities. Please go ahead.

Greg Hillman - First Wilshire Securities

Yes. Good morning gentlemen. I had two questions; the first was about fee income as a percentage of ordinary income of 2007. Do you know what that was?

Malon Wilkus - Chairman, Chief Executive Officer and President

Well, we have a chart; we will just look where that chart is.

Greg Hillman - First Wilshire Securities

And then...

Malon Wilkus - Chairman, Chief Executive Officer and President

Is that 80?

John Erickson - Executive Vice President and Chief Financial Officer

81.

Greg Hillman - First Wilshire Securities

Okay.

Malon Wilkus - Chairman, Chief Executive Officer and President

81, 21%.

Greg Hillman - First Wilshire Securities

Okay.

Malon Wilkus - Chairman, Chief Executive Officer and President

Our asset management and advisory fee is 21% of our total.

Greg Hillman - First Wilshire Securities

Okay, thank you. And then the other question concerned European capital and basically kind of some comments whether it constraints the growth and what will take it to become more material to your business. And I think I read some comments by Samuel Flax indicating the regulatory environment in Europe was tougher than he originally anticipated. You have to abide by the laws of ach country you are in and the European community doesn't have any common laws as applies to your business. And then also could you comment for European capital in terms of sourcing, how you source deals in Europe versus how source deals in United States. [Multiple Speakers].

Malon Wilkus - Chairman, Chief Executive Officer and President

Our General Counsel doesn't get a chance to talk on this call every often.

Samuel A. Flax - Executive Vice President and General Counsel

I think we spent a lot of time... I think we that is accurate, but we found it somewhat more complicated than here, but we have spent a great deal of time learning and educating and adjusting our operations in a way that to make them fully compliant with the regulatory legal structure is over there. And I think we have been quite successful. I think that work, which you are asking that has been done.

Greg Hillman - First Wilshire Securities

Okay. And is the regulatory environment going to change to be more favorable to your business over there in the future.

Samuel A. Flax - Executive Vice President and General Counsel

I don't know that we have any insight into this that it's going to change. We don't necessarily expect any impediments to be added. There... as a general matter, the EU does seem to be working very hard to take down some of the barriers for inter country type transaction. I mean I think it will be a long way from being like the United States were essentially seeing what as you go from state-to-state. But they have made a great deal of progress, and I think it's a general matter probably anticipate greater progress going forward.

Unidentified Company Representative

And in terms of sourcing deals, we are following the exact same model and European capital that we followed at American Capital, which is multiple offices in local markets with local payment, so that's why we have four offices in Europe today. We opened the offices in Frankfurt and Madrid last year. We will evaluate opening additional offices to access local markets in Europe in the future, but right now with our four offices, we are probably accessing well north of 80% of the deal flow and the opportunities are available. So it's all of about having right people in the local markets with the local relationships with private equity firms and other banks and other financial institutions to access the deal flow. So that's what we do in those all for of those offices exactly in the same way that we do it here with people in Dallas and LA and Chicago and Boston and so on. So it's a middle market focused operation.

Greg Hillman - First Wilshire Securities

In terms of how they... you haven't had an opportunity to do any IPOs with those firms yet, I'll take it.

Unidentified Company Representative

Keep in mind we'll do almost no IPOs, so in our history with about 450 companies that we have invested in only about six of them have IPOs.

Unidentified Company Representative

In fact there was one of our portfolio companies in Europe that did do an IPO in the French market last year, early in last year. But it's very rare that the liquidity of that for us is an IPO, it does happen in maybe once in a while.

Greg Hillman - First Wilshire Securities

Okay. And the source when us said you are number two or number three in Europe and middle market, what was the source of that statement?

Unidentified Company Representative

We keep our own proprietary database of all the transaction that are done by private equity firms. We keep that on a global basis. So we have a granular detailed proprietary database of every transaction that we can identify that's been done in the marketplace. And that's how we conclude where we fit into the market and how active we are relative to the other competitors. So when you see the slides we put together here about the 244 deals being done by 22 other firms and what was our interaction with them, that's because of the proprietary database that we have... that we been maintaining for about six or so years now.

Greg Hillman - First Wilshire Securities

Okay. And those offices, how long have they been open in Europe in the various cities, what cities you are in?

Unidentified Company Representative

We started with London and Paris in the spring of 05, so were almost three years into London and Paris. We opened Frankfurt about 12 months ago and Madrid about five or six months ago.

Greg Hillman - First Wilshire Securities

Okay. And do you think European capital will reach a certain critical mass and start to accelerate your growth as opposed to over the last two years?

Unidentified Company Representative

I think we still have some additional offices to open. You could open an office in Italy; you could do something in Scandinavia, perhaps in Amsterdam. But we are accessing the largest markets right now between the UK, France and Germany, which would be the three really largest markets for leverage by us in Europe. So we are still building our market coverage there, and still building our deal flow and building our pipeline. But we have a very good start on accessing the most of the markets in Europe.

Greg Hillman - First Wilshire Securities

Okay, thank you.

Malon Wilkus - Chairman, Chief Executive Officer and President

You are very welcome, and thanks everyone. And I would like to urge you to call Tom McHale or his team. We have got a great team to help any of our investors or the market to understand us better. And thank you again and appreciate it, and look forward to talking to you again next quarter.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 3:00 O'clock PM today running through February 27th till mid night. You may access the AT&T Replay System at anytime by dialing 1-800-475-6701. International participants dial 1-320-365-3844; and when prompted, enter the access code of 906180. Those numbers again 1-800-475-6701, international 1-320-365-3844, access code 906180.

That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: American Capital Strategies Ltd. Q4 2007 Earnings Call Transcript
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