Christian Leone’s Luxor Capital Joins John Paulson in American Capital

PAULSON & COOn July 9th Luxor Capital Group, LP announced that it had accumulated over 17.5 million shares of American Capital (ACAS), giving them 5.3% of the shares outstanding- roughly the same percentage of the company held both by John Paulson’s Paulson & Company and Fortress Investment Group.  ACAS has had an excellent year, up about 40%, and announced a share buyback program at the end of June.  Luxor’s buying indicates that they are either betting on this positive momentum to continue or find American Capital, a private equity firm that also provides debt financing both to their own buyouts and to other private equity firms, undervalued at a price-to-earnings ratio of 3.1.  Luxor Capital’s most recent reported holdings also include Express Scripts (ESRX) and AMC Networks (AMCX).  Luxor initiated the position at some point between April and June, and finally acquired enough shares of ACAS to achieve 5% ownership of the shares outstanding on June 27th, when ACAS closed at $9.84.

As mentioned, American Capital can also be found in the portfolios of other hedge funds.  It was the fourth largest position held by Fortress Investment Group at the end of March; Fortress has held this position for some time and increased it by 66% during the third quarter of 2011, though they did sell 10% of their shares earlier this year (see Fortress Investment Group’s other top holdings).  Of course, Fortress’s private equity arm competes with American Capital.  John Paulson also held over 18 million shares of the company at the end of March; he had owned nearly 44 million shares at the end of June 2011 but had been selling his stake for some time, including a large part of his position in the first quarter of the year (see John Paulson’s top picks); while he missed out on some of the stock’s rally this year he is well positioned to profit from any further upward movement.  Cliff Asness’s AQR Capital Management also increased its position in ACAS to nearly 5 million shares, though it was still a small portion of his portfolio (see more of Cliff Asness’s stock picks).

American Capital competes with many privately held private equity firms as well as with several publicly held peers.  As mentioned, Fortress (FIG) manages private equity funds as well as being a hedge fund investor.  MCG Capital Corporation (MCGC) is another publicly traded peer, although both of these companies have substantially smaller market caps than American Capital ($760 million for FIG and $350 million for MCGC versus $3.2 billion for ACAS).  This is likely driven by FIG and MCGC having negative earnings per share over the last twelve months.  FIG is about even with the market performance so far this year with returns of about 5% while MCGC is up about 15%.

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