The Only Private Equity Fund I'd Buy
By Graham Summers
July 9, 2007

The Wall Street Journal is a decade late on this one.

The headlines focus on the IPOs of Blackstone and Kohlberg Kravis and Roberts as if they're revolutionary. But the fact of the matter is that both firms are latecomers to public markets.

In fact, one particular private-equity fund has been publicly traded since 1997. It's not a small fund, either. With more than $12 billion in assets under management, it's the third-largest publicly traded private-equity fund behind Blackstone and Fortress.

Since going public, this fund has shown investors an average annual return of 23%. It's also paid out more than $24 per share in dividends. And its current yield (7.8%) blows away anything Fortress, Blackstone, or KKR have to offer

Because this company focuses exclusively on smaller deals – its average investment is $100 million – it can usually pony up all of the cash necessary to close. Since it doesn't need to involve banks or other institutions, it closes its deals at a much greater rate than its larger competitors: In 2006, this company closed 26 deals.

KKR closed only seven.

And lest you think this speed compromises the company's due diligence, consider the following: This company closes only 1.4% of the deals it considers. It gleaned the 26 deals it closed in 2006 from more than 3,800 potential companies.

I'm talking about Inside Strategist holding American Capital Strategies (ACAS).

ACAS has more than 140 dealmakers, 30 operations managers, and 62 accountants, all of whom look into a prospect's operations and financials. A potential company must pass five total reviews before ACAS invests a cent. Every single ACAS employee involved has the power to veto a deal completely if something strikes him funny.

After all of this, a company is finally presented to ACAS's investment committee – six top-level executives, including its founder Malon Wilkus.

I first recommended ACAS stock to Inside Strategist subscribers in July 2006. At that time, the company's senior executives had purchased more than $7 million worth of ACAS stock. Among the buyers were founder Malon Wilkus, director Kenneth Peterson, director Phillip Harper, and executive vice president Samuel Flax.

In the past year, readers have made about 45% on ACAS.

And ACAS is still cheap. KKR trades at 13 times earnings, ACAS trades at seven times earnings.

But here's what really makes ACAS different from its peers…

A typical leveraged buyout (LBO) firm pools its capital with a company's management to finance up to 25% of the company's acquisition price, using the company's assets as collateral on a loan for the other 75%. Once it takes the company private, the LBO firm sells off various portions of the company to cut costs and streamline the business. The restructured company is then sold for a profit.

ACAS, on the other hand, funds all of its investments using public capital. Part of the reason ACAS is so cheap is that Wall Street has a hard time figuring out why the company would go to the public rather than taking several months to raise funding from institutions or loading up its companies with tons of debt.

Later this week, I'll show you how to take advantage of ACAS' unique structure to leverage your gains.

Good trading,

Graham