Private Equity For The Public

By Gregory S. Davis | June 19, 2008 AAA

After years of mediocrity and dissapointment the Boston Celtics have returned to glory as NBA champs. How did they do it? The Celtics are the team that private equity built. The 25 members of the team's ownership syndicate, led by venture capitalist Wyc Grousebeck, shared a love for the game, but they also shared a love for the elite, high-stakes world of private equity and hedge fund management.

They walk in exclusive circles, but even if you don't have the cash to buy a sports team, there are now ways to buy your way into the world that gave the Celtics owners their money. While there are only a few publicly traded private-equity firms, American Capital Strategies (Nasdaq:ACAS) is banking on a diversified portfolio and multiple income streams to earn investors confidence as their No.1 pick. To learn more, check out Private Equity Opens Up For The Little Investor.

Background
American Capital Strategies operates as a private equity fund and an alternative asset management company. It identifies companies that it can acquire, restructure and sell in a few years time hopefully at a profit. The firm also provides capital in the form of equity and debt to growing companies.

American Capital Strategies participates in the $5 million-to-$800 million space per company, with a typical investment landing right around $50 million. Its track record of stability and earnings growth led to its inclusion in the S&P 500 last year. The company ended 2007 with $17 billion in assets under management up 51% from the previous year and 285 portfolio companies. (To learn what PE firms look for in a target, read How The Big Boys Buy.)

Tough First Quarter
American Capital Strategies recorded $997 million in net unrealized depreciation in its investment portfolio for the first quarter of 2008. The decline was led by its structured products investments in vehicles like CMBS, CLOs and CDOs. (To find out how these instruments work and how they are used in the market, in The Alphabet Soup Of Credit Derivative Indexes.)

Three Reasons American Capital Strategies May Rise

  1. It has a price-to-earnings-growth (PEG) ratio of 1.24. The PEG ratio is PE divided by the future expected earnings growth rate. Value investors are attracted to companies trading near or below "1" because a low PEG represents and inexpensive stock relative to expected future earnings growth.

  2. The firm's price-to-book (P/B) value is 1. A P/B of 1 can either mean that the company's assets are overvalued or that it is earning a poor return on its assets. ACAS managed to generate a 15% return on equity over the past five years suggesting that the current downturn in the market may present an opportunity for investors.

  3. Since the last recession in 2001, American Capital Strategies has diversified its income stream. It now earns a predictable management fee from its alternative asset fund, American Capital, LLC, which manages private equity investments and commercial mortgage loans of third parties.

High Dividend Yields
Dividend paying stocks are great for individual retirement accounts and for investors interested in receiving income while the market cycles up, down and sideways. American Capital Strategies has a high 14.51% dividend yield. Other private equity plays with high dividends, low P/B and low PEG include Allied Capital (NYSE:ALD), ARES Capital (Nasdaq:ARCC) and MCG Capital (Nasdaq:MCGC).

Buy, Hold, Sell or Stay Away?
The repair of the credit system and the liquidity crises is probably in a very earlier stage of recovery, so interested investors may consider dollar cost averaging their way into the public private-equity space. At the very least these companies have attractive valuations and dividend yields that can make waiting out the recovery less painful.

For more on dividends, check out our related articles The Power Of Dividend Growth, and The Importance Of Dividends.

comments powered by Disqus
Related Analysis
  1. The ADX Shows Strong Uptrends In These 4 Stocks
    Chart Advisor

    The ADX Shows Strong Uptrends In These 4 Stocks

  2. Downward Trend Channels for the Market Correction
    Chart Advisor

    Downward Trend Channels for the Market Correction

  3. The Only Energy Stocks You Need To Own Right Now
    Investing

    The Only Energy Stocks You Need To Own Right Now

  4. Where I'm Looking For Value In The Oil Sector
    Investing

    Where I'm Looking For Value In The Oil Sector

  5. In The Week Ahead: No Clear Sign Of A Market Bottom
    Investing

    In The Week Ahead: No Clear Sign Of A Market Bottom

Trading Center