February 23, 2017
DPITVPIcomparison

In January 2017, middle market private equity firm Northlane Capital announced that it was spinning out from publicly-traded BDC American Capital as the latter firm was acquired.

Northlane Capital is made up former staff from American Capital and manages American Capital Equity III (ACE III), a $1 billion private equity fund that closed in September 2014.[i]

As part of the spinout, ACE III limited partners purchased American Capital’s commitments to ACE III and Northlane assumed the management contract for the fund. ACE III’s name will also change to Northlane Capital Partners I, L.P.[ii]

ACE III limited partners include Coller Capital, Goldman Sachs Asset Management and StepStone Group.[iii]

A new report by UNITE HERE, “What’s behind American Capital Equity III’s sky high returns?”, looks at American Capital Equity III’s performance and asks whether American Capital Equity III acquired its initial portfolio companies at artificially low prices.

Key points:

  • Northlane Capital is made up former staff from American Capital and manages American Capital Equity III (ACE III), a $1 billion private equity fund that closed in September 2014.
  • As of mid-year 2016, American Capital Equity III had generated a 98.7% net IRR and had already returned to investors nearly one and a half times what they put in. According to Cambridge Associates, the median 2014 US private equity fund had generated a -0.04% return and the median distributions-to-paid-in-capital (DPI) ratio was 0 (i.e. no distributions yet).
  • In May 2014 American Capital launched American Capital Equity III with investments from Coller Capital, Goldman Sachs Asset Management and StepStone Group. Coller Capital characterized itself as a “leading member” in the investor group.
  • In addition, a number of American Capital employees were allowed to invest in ACE III and also allowed them to participate in incentive fees earned by the GP and a portion of the distribution of any earnings of the GP. ACE III fees were generous – 2% management fee and up to a 30% carried interest.
  • When ACE III closed in September 2014, American Capital disclosed that employees’ investment in ACE III was worth more than five times what they had invested after just a few months.
  • As part of the formation of ACE III, American Capital agreed to contribute all of its equity and equity-related investments in seven portfolio companies to ACE III and to provide ACE III with an option to acquire another portfolio company for a total of $640 million, a 4% premium to what American Capital valued those stakes at as of 2Q14.
  • Between August 2014 and January 2016, ACE III proceeded to sell five of the eight portfolio companies at premiums of between 83% and 1,168% to what American Capital valued them in mid 2014.
  • As of mid-year 2016, ACE III had distributed around $1.2 billion to investors (employee investors, Coller Capital, Goldman Sachs Asset Management, StepStone Group, etc.). This is in addition to management fees and carried interest paid to the GP.
  • Northlane Capital, Coller Capital, Goldman Sachs Asset Management and StepStone Group investors should investigate whether the companies were sold at artificially low prices to ACE III.

 

Questions:

  • How did American Capital principals ensure that the $640 million agreed to for the eight portfolio companies was a fair price for both parties?
  • In the case of Affordable Care Holding Corp (ACH), what were the five companies that reportedly turned down an acquisition of ACH at the approximately $153 million price that ACE III acquired it for?
  • How did Messrs. Eagle, Krichevsky, Steinglass and DuFour mitigate conflicts of interest created by being on both sides of the sale of sale of American Capital portfolio companies to ACE III?
  • What role did Coller Capital, Goldman Sachs Asset Management and StepStone Group play in the structuring of American Capital Equity III and the pricing of companies sold from American Capital to American Capital equity?
  • Why did Coller Capital, Goldman Sachs Asset Management and StepStone Group agree to 30% carried interest for ACE III GP.
  • Beyond selling Avalon Laboratories, CIBT, Mirion Technologies, Affordable Care Holding Corp, and WRH, what actions did ACE III GP take to add value to the firms after they were acquired by ACE III?
  • Which American Capital employees invested in ACE III GP? What did they invest?
  • What consideration did ACE III limited partners provide to purchase American Capital’s stake in American Capital Equity III?

 

Full report available here.

 

 

 

[i] Media release, “Northlane Capital Partners Spins out from American Capital; Will Continue to Manage $1 Billion Middle Market Buyout Fund,” Jan 23, 2017.
[ii] Media release, “Northlane Capital Partners Spins out from American Capital; Will Continue to Manage $1 Billion Middle Market Buyout Fund,” Jan 23, 2017.
[iii] Media Release, “American Capital Launches $1.1 Billion U.S. Lower Middle Market Private Equity Fund,” May 6, 2014.