Elliott opposes American Capital’s BDC spin-out

The hedge fund firm owns an 8.4 percent interest in American Capital and has advised shareholders to vote against the planned spin-out, saying it’s unlikely to create value for stockholders.  

Elliott Management, which manages holds an 8.4 percent interest in American Capital (ACAS), has filed a presentation with the Securities and Exchange Commission (SEC), asking ACAS stockholders to vote against the company’s planned BDC spin-off.

American Capital didn’t respond to a request for comment by press time.

In Elliott’s letter to American Capital’s board, the firm said: “We are convinced that the company’s plan to spin out BDC assets into a new business development company and create a stand-alone, external asset manager will put valuable assets at risk, serve to entrench management and significantly limit options for future stockholder value creation.”

The spin-out proposal comes “after years of value destruction, as ACAS shares have traded at a median price to net asset value of 71 percent since the beginning of 2011, compared to 115 percent for comparable BDCs”, Elliott executives said.

The reasons for these poor performance drivers have been ineffective management, capital deployment into illiquid and risky assets and a board that lacks relevant experience to oversee the investment team and hold management accountable, Elliott wrote. The vehicle also has a compensation structure that rewards failure, Elliott contends. “ACAS has consistently paid excessive compensation for poor performance, as evidenced by the company receiving ‘F’ grades in Glass Lewis’ pay-for-performance model for each of the last four years (and no better than a ‘D since 2008),” Elliott said.

“Management’s spin-off plan exacerbates these issues, by further entrenching an ineffective management team, establishing a sub-scale investment management platform with questionable ability to deliver stockholder returns and permanently squandering the company’s opportunity to fully optimize ACAS’ existing platform and realize meaningful upside,” said Elliott’s statement, which can be found on a newly created website

Elliott is proposing a five-step plan instead of the spin-out. This would involve: withdrawing the spin-out proposal; adding more qualified independent directors to the board; reviewing the portfolio and capital allocation and expanding targets for share repurchases; cutting overhead to reduce costs by $50 million to $75 million per year; and engaging in a comprehensive strategic review that would involve a strategic review committee comprised of new directors that would look to maximize shareholder value.

PDI reported last week that American Capital, which handles private debt funds, BDCs, CLOs, European strategies and real estate investment trusts (REITs), was planning to spin off its BDC assets into two separate vehicles, American Capital Income with $5.7 billion in assets and American Capital Senior Floating with $274 million in assets.

Elliott Management is a multi-strategy hedge fund founded in 1977 with about $27 billion in assets under management.