American Capital Asset Management Strategy Update - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to the American Capital shareholders call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to Investor Relations manager, Amanda Cuthbertson. Please go ahead.

AMANDA CUTHBERTSON, IR, AMERICAN CAPITAL: Thank you for joining American Capital Asset Management Strategy update call this morning. Before we begin I will quickly review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that to the extent they are not representations of historical facts constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to Safe Harbor protection provided by the reform act. Actual outcomes and results could differ materially from those forecasted 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 is available on our website and the telephone recording can be accessed by dialing 800-475-6701 and the replay access code is 844086.

At this time we would like to invite the participants to access the slide presentation on our website. If you turn to our website www.acap.com and click on the shareholder call slideshow button in the right corner. If you have any issues pulling up the webcast this morning you may want to disable your pop-up blocker by holding control and selecting link. Finally by selecting conference call option participants can view the streaming slide presentation during this call or alternatively you can select the webcast option for slides and audio. A PDF of the presentation is available on our website and the supplemental materials on the webcast for downloading. And with that I will turn it over to Malon Wilkus, our Chairman and CEO.

MALON WILKUS, CHAIRMAN, CEO, PRESIDENT, AMERICAN CAPITAL: Thank you Amanda. And with me today is John Erickson, our CFO; Tom McHale, our Senior Vice President of Finance; and Sam Flax, our general counsel. Thanks everybody for joining us. We have some good news for you today and we wanted to spend some time to review it so that you can better understand what we've been able to accomplish.

If you move, if you see our slide three, as you know we have been pursuing a strategy of becoming the only U.S. publicly traded manager of funds of private assets and today we advanced that strategy. And if you look at slide four, you can see that we are doing this because publicly traded asset managers and today in the United States there are only publicly traded asset managers of funds of public assets.

Those management companies trade approximately 20 times their earnings as a multiple. Today we are trading about seven times, and we would hope as we advance this asset management strategy that we move from the seven times to 20 times multiple in valuation.

There is an example of that as this slide points out, Intermediate Capital. It is a UK mezzanine fund that funds into Europe and half of their assets or approximately half of their assets they manage on balance sheet internally and the other half they manage externally. And they are trading at almost double on multiples today. And it seems the market does recognize the quality of earnings as an asset manager and as more of our earnings result from our asset management business we believe that we should enjoy this higher valuation.

So moving to slide five, you can see that we've accomplished exactly that. We have established now our second fund under management and we are calling it American Capital Equity I and American Capital Equity I is no longer in development. We have now two funds that we are managing in that European capital that was established in 2005, and now our second fund American Capital Equity. We still have under development a variety of additional funds and hopefully you will be hearing more about those in the years ahead.

If you go to slide six you will see that we are tracking the progress of our fund development strategy, and you can see that for American Capital Equity I we have raised a $1 billion equity fund, 670 million of that has already been deployed, and we are enjoying a set of asset management fee and a carried interest. We will talk more about all of that, but you can see the various progress of our fund development strategy. So now we have two private funds, European Capital and American Capital Equity I.

Moving to slide seven, let's talk specifically about American Capital Equity. If you move to slide eight, you can see kind of the structure of what we've accomplished, what we have done is formed a syndicate of investors, HarbourVest Partners, Lexington Partners, Partners Group. You can see that in the upper right box. They invested $1 billion, committed $1 billion to American Capital Equity I. We are drawing down the first $600 million that will go to American Capital of proceeds of selling the $670 million of equity investments. That is a 30% strip. And at the same moment American Capital Equity I is entering into a management agreement with a wholly-owned subsidiary of American Capital, that is American Capital Equity Management LLC, the lower left-hand box, that is a wholly-owned taxable affiliate of American Capital. And that it is American Capital Equity Management that will be earning a 2% and up to 30% carried interest.

So let's go to slide nine and discuss in greater detail what we've done with American Capital Equity I. We had three private equity fund investors that committed $1 billion to American Capital Equity I and $670 million was used immediately to purchase a 30% strip of the ACAS equity portfolio. This is purchased on pari passu basis with the other 70% that American Capital will retain.

None of our debt securities were sold, and in fact none of the warrants on any debt securities was sold as part of this transaction. The purchase price was based on the second quarters 2006 fair value and the additional $330 million commitment that these three funds have committed to American Capital Equity I will be invested in a 30/70 ratio in future equity investments that American Capital originates and invests in. And they will invest in all of the next $330 million worth of opportunities that we create for equity investments; there will be no cherry picking of those investments, and we would once the whole $1 billion of capital has been invested, then we would continue to manage the fund thereafter until we exit all of those investments.

We go to slide 10, the investors is HarbourVest, who is the lead investor in this effort. HarbourVest has over $13 billion of capital invested in private equity investments. Lexington Partners is another partner in the investor group with over $12 billion of capital invested in private equity assets. And then Partners Group with over $14 billion of -- let's say that is $14 billion of Swiss franc and invested in private equity assets.

So these three firms have tremendous experience making investments pari passu with other limited partner investors in private equity funds. They've invested all over the world in private equity and have tremendous experience. They did a great amount of due diligence before making the decision to invest $1 billion with American Capital. They reviewed our ACAS due diligence materials. They reviewed our quarterly valuation materials. They had interviews with our senior management teams, and of course with our deal teams in all of our offices. They had portfolio company management interviews and they interviewed private equity firms with whom we partnered and provided capital for other private equity firms buyout transactions. They spent five months conducting this due diligence.

Move to slide 11, so we're very pleased with -- we were very impressed with the work they did, and we are very pleased that they concluded to participate and invest in our equity fund. Now the agreement that we have with American Capital Equity I is that we will earn a 2% asset management fee on the cost basis of the assets in the fund that will initially be a start at $13 million on an annualized basis and grew to 20 million. And then as we exit these investments that fee will decline as the assets that we …