Type: Public Company
Address: 2 Bethesda Metro Center, 14th Floor, Bethesda, Maryland, 20814, U.S.A.
Telephone: (301) 951-6122
Fax: (301) 654-6714
Web: http://www.american-capital.com
Employees: 484
Total Assets: $8.6 billion (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: ACAS
Incorporated: 1996
NAIC: 523920 Portfolio Management; 522298 All Other Non-Depository Credit Intermediation
SIC: 6282 Investment Advice; 6111 Federal & Federally-Sponsored Credit; 6159 Miscellaneous Business Credit Institutions
American Capital Strategies, Ltd. (ACS), is the second largest, publicly traded alternative asset manager in the United States. The company, organized as a business development company, focuses on middle-market mezzanine transactions, providing equity and debt financing for companies generating between $5 million and $750 million in annual revenues. ACS has invested in more than 160 companies involved in virtually every type of industry. The company operates ten offices in the United States and Europe.
Origins
ACS's founder, Malon Wilkus, started a homespun consulting business and turned it into a financial titan with $8.6 billion in assets. It was the crowning accomplishment in a singular career, a career that included stints as a fisherman in Mexico, a busboy in Costa Rica, and a sandal-maker in the Ozarks. Wilkus was raised in Coffeyville, Kansas, where his father worked in a factory owned by Continental Can and where residents knew him as Edward Frank Wilkus. When he was 18 years old, Wilkus began referring to himself as Malon, a name of his own choosing that he used when he enrolled at the University of Illinois. Wilkus dropped out of college at age 20 in 1972, shelving his education to embark on an adventure in Latin America. He left the United States with $125 and only a vague idea of what he would do to survive. He worked in restaurants and he fished to support his travels, establishing his own shrimp farm in Costa Rica at one point.
In 1974, he returned to the United States, enrolled at the University of Illinois, and dropped out again. He packed his bags for his second adventure and headed to the Ozarks, where he joined a commune, East Wind, which drew its name from a Mao Zedong dictum predicting the global domination of socialism. Wilkus made hammocks, nut butters, and sandals, eventually turning his efforts into a $1 million-in-sales business that counted Pier 1 Imports, Inc., as one of its customers, but after a nine-year stay in the Ozarks he grew disillusioned with the principles espoused by East Wind. "I thought I could create a better society, but common ownership didn't work," Wilkus said in an April 23, 2007, interview with Forbes. "So, I became a capitalist."
Wilkus, who earned $1,500 per year while he was a member of East Wind, began pursuing a path that would lead to an annual salary of $3.5 million and stock worth $60 million. In 1983, he took a job as a marketing assistant at Calvert Securities Corporation, an investment management company that focused on socially responsible mutual funds, quickly earning a promotion to vice-president that put him in charge of managing 11 different mutual funds. Wilkus left Calvert Securities three years after he joined the company, ready to start out on his own. He formed ACS in 1986, using his two-bedroom condominium in Bethesda, Maryland, to house his modest operations. He created the company to act as a financial adviser, the role ACS would play during its first decade of business and one distinctly different than the description of the company in the 21st century. Wilkus focused on employee stock ownership programs (ESOPs), using them as a tool to structure and to obtain funding for management- and employee-led buyouts of subsidiaries, divisions, and product lines being divested by larger corporations. Wilkus orchestrated ESOP-buyouts involving such companies as Sunbeam Corporation, Campbell Soup Company, Union Carbide Corporation, Ampco-Pittsburgh Corporation, and British Petroleum. He also provided financial advisory services to a host of other companies, including AMR Corporation, Simmons Mattress Corporation, Circle K Corporation, and John Morrell Meat Company. During ACS's first decade in business, Wilkus spearheaded 11 ESOP deals and provided advisory services in 17 other transactions, arranging financing deals worth more than $400 million.
Changing Strategies in 1997
For Wilkus, the two-time college dropout and former commune member, ACS represented a dramatic change in direction in his life. The transformation from hammock-maker to negotiator of multimillion-dollar financing arrangements became more pronounced after Wilkus shifted gears in 1997, when he decided to fundamentally change ACS's focus. During the previous seven years, he had made equity investments in seven of the businesses he had assisted in his capacity as financial adviser, which provided the impetus for ACS's new strategic course. Wilkus led ACS through an initial public offering (IPO) of stock in August 1997, raising $136 million by selling 9.12 million shares at $15 per share. As part of the conversion to public ownership, Wilkus organized ACS as a business development company, or BDC, a publicly traded vehicle exempt from corporate taxes provided it distributed at least 90 percent of its operating income and short-term capital gains in dividends. With its status as a BDC, ACS intended "to enhance the value of its common stock by pursuing advantageous lending opportunities with selected businesses that do not have sufficient access to traditional sources of lending, thereby capitalizing on inefficiencies in the small to medium sized commercial lending market," according to the company registration statement filed with the Securities and Exchange Commission on June 24, 1997.
ACS, from 1997 forward, would concentrate on providing debt and equity financing to companies, or what Wilkus referred to as "one-stop buyouts." In a statement released on August 24, 1997, by PR Newswire, Wilkus explained the merits of ACS's new role. "Our core group of senior professionals has now been working together for a decade," he said. "As a result of our recently completed public offering, we will be able to move swiftly and surely to finance and close buyout transactions using our own capital, which in the past might have taken months of coordination of financing sources."
Wilkus positioned ACS as an alternative asset manager, casting the company in a role likened to that of a subprime market lender. Subprime lenders catered to borrowers with suspect credit, lending money to individuals without the collateral or documentation to satisfy the criteria of traditional lenders. ACS targeted private companies who also had difficulty obtaining financing from conventional sources, but the ideal candidates by no means stood on shaky ground. The company favored profitable companies with adequate assets for loan collateral that had a potential for growth and an experienced management team with significant ownership interest. To assist him in his new mission, Wilkus enlisted the help of David Gladstone, who had spent 22 years making loans and investing at Allied Capital, the oldest and largest BDC in the country. Gladstone was nominated as chairman following ACS's IPO, a post he would occupy for three years until he left to start his own BDC and an ACS rival, Gladstone Capital Corporation.
Within a few short years, ACS became one of the most active debt and equity financing companies the mid-market had ever seen. Wilkus looked at a highly fragmented industry and set out "to rationalize" it, as he said in a May 17, 2004, interview with the Daily Deal, using mezzanine transactions as his primary investment tool. By deploying mezzanine capital, Wilkus gained equity stakes in the companies he provided financing to, often assuming a controlling interest in the companies. By the time he gave his interview with the Daily Deal, ACS claimed to have the largest market share of middle-market mezzanine transactions in the United States, but the company's dominance amounted to only a 6 percent share of the market. The industry was populated by roughly 1,000 equity firms that entered into only a few transactions a year; approximately two-thirds of the equity deals completed in a year were completed by firms involved in no more than two transactions. "What other industry can you think of that delivers its service only one or two times a year?" Wilkus asked in an April 23, 2007, interview with Forbes. Wilkus assumed a much more ambitious stance, seeking to rationalize the industry by scouring the country for investment candidates. He began in 1997 with 17 employees and $300 million to invest, the starting point of the new iteration of ACS.
In the decade following ACS's IPO, Wilkus's investment activity gradually increased, building into a crescendo of deal making that required a staff of nearly 500 professionals to execute. At first, the company invested roughly $100 million a year, but the average outlay shot upward as the years passed, eclipsing $1 billion annually a decade after Wilkus transformed ACS into a BDC. To obtain the capital to fuel his investment activity, Wilkus turned to Wall Street, selling ACS stock to fill his coffers. In August 1999, after ACS had deployed $240 million of equity and debt during the previous two years, Wilkus completed his first secondary offering, selling five million shares at $17 per share to raise $85 million. Wilkus would repeat the maneuver whenever he needed to obtain more capital, organizing 27 separate public offerings of stock as he fattened ACS's portfolio.
A Flurry of Transactions
ACS's deal-making pace picked up speed in the years leading up to the company's 20th anniversary. Between 2002 and 2006, operating income increased robustly, rising from $147 million to $860 million. The company invested $576 million in 2002 and nearly doubled its outlay the following year, when ACS provided $1.1 billion in debt and equity financing. Increasingly, the company was favoring equity deals over pure lending deals, completing 32 mezzanine transactions worth roughly $700 million in 2003, more than half the total invested during the year, and committing $158 million to acquire controlling stakes in its investments. Industry participants took note of ACS's behavior, specifically its penchant to act as an equity sponsor. "There's a growing tension in the marketplace," an investment banker said in a May 17, 2004, interview with the Daily Deal, referring to ACS. "Are they fish or fowl, financier or buyer, helper or competitor?" the investment banker asked. "That's a real issue being debated among a lot of private equity guys right now."
Wilkus pressed ahead, indifferent to the concern in the marketplace. In the first quarter of 2004, he invested $47 million into equity deals, twice the level committed two years earlier. He also began exploring investment opportunities overseas, establishing a subsidiary, European Capital Financial Services, Ltd., in 2005 to spearhead ACS's involvement in European investment opportunities. "Having invested in three buyouts in Europe over the past three years without a European presence," Wilkus explained in a May 9, 2005, interview with Bank Loan Report, "we concluded ... that it was time we establish European Capital as a permanent presence on the continent."
By its 20th anniversary, ACS had investment connections with roughly 160 companies. The companies were involved in an array of markets, ranging from truck lift manufacturers to football helmet makers to aircraft designers. On average, the collection of ACS affiliates generated $108 million in annual revenue and had been in business for 32 years. As ACS entered its second decade as a BDC, the number of its investment companies was expected to increase substantially. Wilkus was securing capital in enormous quantities, instructing his investment teams to cull through a list of nearly 4,000 potential takeovers each year. In October 2006, ACS announced $1 billion in new funding, the single largest infusion of capital in the company's 20-year history. In January 2007, he raised an additional $250 million through another stock offering before turning to Wall Street again in March 2007, when he raised $450 million. In July 2007, when ACS became the first publicly traded, alternative asset management company to be listed on the S&P 500 Index, Wilkus raised an additional $750 million. He was armed and ready to deploy his capital, intent on adding to the $15 billion in assets he had under management. "The private partnerships had their heyday [in real estate]," Wilkus said in an April 23, 2007, interview with Forbes, comparing real estate with corporate financing. "The public REITs, with their transparency and efficiency, wiped them out." As for private equity, Wilkus's forecast was resolute: "The publicly traded firms will end up dominating."
Principal Subsidiaries
American Capital Financial Services, Inc.; ACS Funding Trust I; ACS Funding Trust II; ACAZ Business Loan LLCC, 2004-1; ACAS Business Loan Trust 2004-1; ACAS Business Loan LLC, 2005-1; ACAS Business Loan Trust 2005-1; ACAS Business Loan LLC, 2006-1; ACAS Business Loan Trust 2006-1; European Capital Financial Services (Guernsey) Limited; European Capital Financial Services Limited (U.K.).
Principal Competitors
Allied Capital Corporation; Gladstone Capital Corporation; Fortress Investment Group LLC.
Further Reading
"American Capital Strategies Ltd. of Bethesda Now Listed on S&P 500 Index," Daily Record, July 17, 2007.
Bacchus, Joe, "Bethesda-Based American Capital Strategies Ltd. Spreading the Wealth," Daily Record, October 11, 2006.
Condon, Bernard, "Man in a Hurry," Forbes, April 23, 2007.
Green, Leslie, "American Capital Nails $85M Offering," Private Equity Week, September 20, 1999, p. 7.
Greenberg, Herb, "Beware the Dazzling Yield: Business-Development Companies Offer Tempting Dividends," Fortune, September 30, 2002, p. 180.
Kantin, Kerry, "American Capital Crosses the Atlantic to Set Up Paris Affiliate," Bank Loan Report, May 9, 2005.
Tenorio, Vyvyan, "Friend or Foe?" Daily Deal, May 17, 2004.
— Jeffrey L. Covell
