FultonView Research

December 9, 2015

American Capital, Ltd. (ACAS)

Executive Summary
ACAS asset values are, in our opinion, inflated and unreliable. The majority of ACAS book value
is categorized as Level 3 assets, which is subject to management judgment. Upon analyzing
some of ACAS largest investments based on ACAS own financial statements and other
documents in the public domain, we have identified what we believe is evidence of dramatically
inflated investments.
A review of its history suggests that ACAS has unloading a number of investments into private
equity funds it manages, which have then underperformed, only to buy some of the assets back
and write them down in what we believe amounts to a shell game to justify its book value.
A recently raised private equity fund is structured to richly reward management. A number of
assets from ACAS have been sold to the fund only to be quickly flipped at substantial premiums.
In the process, we believe management has enriched themselves by as much as $500mm at the
expense of shareholders. Precedent suggests these transactions could trigger an SEC
investigation.
We have no faith in ACAS book value or its management team. We believe the companys assets
are inflated and value ACAS at $8.97 per share with a view of 37% downside.

-1-

Disclaimer
You should assume that as of the publication date of our reports and research, FultonView Researchs
clients and/or investors, may have a short position in the stocks (and/or options, swaps, and other
derivatives related to the stock) and bonds covered herein, and therefore may stand to realize
significant gains in the event that the price of the covered stock or bonds decline. They may continue
transacting in the securities of issuer covered in this report for an indefinite period after our first report,
and may be long, short, or neutral at any time hereafter regardless of our initial opinions and views.
You agree that the use of FultonView Research is at your own risk. In no event should FultonView
Research be liable for any direct or indirect trading losses caused by any information available on this
site or this report.
FultonView Research makes no representations, and specifically disclaims all warranties, express,
implied, or statutory, regarding the accuracy, timeliness, or completeness of any material contained in
this report. You should seek the advice of a security professional regarding your stock transactions.
This is not an offer to sell or a solicitation of an offer to buy any security, nor shall FultonView Research
offer, sell or buy any security to or from any person through this site or reports on this site. FultonView
Research is not registered as an investment advisor in any jurisdiction. If you are in the United Kingdom,
you confirm that you are accessing research and materials as or on behalf of: (a) an investment
professional falling within Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (the "FPO"); or (b) high net worth entity falling within Article 49 of the FPO.
Our research and reports express our opinions, which we have based upon generally available public
information, field research, inferences and deductions through our due diligence and analytical process.
To the best of our ability and belief, all information contained herein is accurate and reliable, and has
been obtained from public sources we believe to be accurate and reliable, and who are not insiders or
connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of
confidentiality to the issuer. We strive for accuracy and completeness to support our opinions, and we
have a good-faith belief in everything we write, however, all such information is presented "as is,"
without warranty of any kind whether express or implied. FultonView Research makes no
representation, express or implied, as to the accuracy, timeliness, or completeness of any such
information or with regard to the results to be obtained from its use.
We, like everyone else, are entitled to our opinions and to the right to express such opinions in a public
forum. We believe that the publication of our opinions about public companies that we research is in
the public interest. This report and all statements contained herein are the opinion of FultonView
Research and are not statements of fact. You can publicly access any piece of evidence cited in this
report or that we relied on to write this report. Think critically about our opinions and do your own
homework and due diligence before making any investment decisions. All expressions of opinion are
subject to change without notice, and FultonView Research does not undertake to update or
supplement any reports or any of the information, analysis and opinion contained in them.

-2-

Background

ACAS is a $3.7bn BDC that operates as an alternative asset manager and private equity firm. What sets
ACAS apart from other BDCs is that it has become the hot target of a laundry list of well-known activist
hedge funds that have been pushing ACAS to unlock shareholder value.
While the activist funds all have their own idea of how to turn around ACAS, the consistent theme is to
reduce the gap between share price and NAV. Orange Capital for example, is demanding that ACAS spinout its asset management business from the investment portfolio, and buy back shares to reduce the
NAV gap. More recently, Elliott Capital Management stepped in to urge shareholders to vote against the
spin-out, and undergo a full review of the assets. Elliott believes that in the best case the shares can
trade at a mere 10% discount to NAV (from the current 30% discount).
We believe that the issue here is not ACAS discount to NAV but rather its self-serving and entrenched
management team supported by an incapable board who have enriched themselves at substantial
cost to shareholders. Both Orange Capital and Elliott dedicate large sections of their public commentary
to criticizing management for the lack of governance and accountability, yet ironically seem to take the
financial statements issued by that same management team at face value. We believe these funds are
basing their thesis on the assumption that the NAV reported by ACAS is a true reflection of its underlying
assets.
We believe that their assumption is wrong.
This research report provides evidence that we believe shows that ACAS management has enriched
themselves at considerable loss to shareholders, that ACAS portfolio is dramatically inflated, and that
the NAV value it reports to investors is a product of management abusing Level 3 subjectivity. Although
activist investors have been proposing creative ways of narrowing the gap between share price and
NAV, they have seemingly given little thought to the reliability of the reported NAV figure itself. In these
way, ACAS reminds us of the subprime crisis where a lot of smart people were so busy structuring and
packaging financial products that they paid little attention to the underlying assets.
We believe that here, ACAS shareholders are holding shares in a company that is worth far less than its
books suggest.

-3-

Level 3 Pixie Dust

The majority of ACAS investments are illiquid and have no active primary or secondary market. These
investments are considered Level 3 assets, which means their value cannot be observed or
corroborated by market data, and are instead estimated by the ACAS Board of Directors. From page 62
of the ACAS 2014 10-K:

Portfolio Valuation
Our investments are carried at fair value in accordance with the 1940 Act and ASC 820. Due to the
uncertainty inherent in the valuation process, such estimates of fair value controls may differ
significantly from the values that would have been used had a ready market for the securities existed,
and the differences could be material. Additionally, changes in the market environment and other
events that may occur over the life of the investments may cause the gains or losses ultimately realized
on these investments to be different than the valuations currently assigned. As of December 31, 2014,
the fair value of 68% our investments were estimated using Level 3 inputs determined in good faith by
our Board of Directors because there was no active market for such investments.

Ominously, at year-end 2014, 68% of ACAS portfolio was valued by its Board of Directors a board,
which, according to Elliott, has no discernible investment experience and lacks the relevant experience
to govern the behavior of the investment team and hold management accountable:

Source Elliott presentation

-4-

How much faith can shareholders truly have in ACAS reported NAV figure when the underlying
investments are determined by a board that, according to Elliott, collectively has little to no investment
experience, and lacks the experience to govern a self-serving management team?
Upon analyzing ACAS largest investments based on ACAS own financial statements and other
documents in the public domain, we have identified what we believe is evidence of dramatic inflated
investments, and also found highly questionable asset sales that seem to have been undertaken to
enrich management and deprive shareholders of over $500mm!

-5-

Inflated Investments
ACAS presents its 10 largest investments on page 65 of its latest 10-Q:

As of Q315, these ten investments represented 33% of ACAS total investments at fair value. The focus
of this research report is on 3 of ACAS top 4 investments (SEHAC Holding Corporation, Bellotto Holdings
Limited and American Capital Asset Management, LLC), where we have identified clear and egregious
material valuation concerns and/or other severe and pressing issues.

-6-

SEHAC Holding
SEHAC Holding (SEHAC) is ACAS fourth largest stated investment at $153mm. SEHAC, operating as
Service Experts, is a residential and commercial heating, air conditioning, and plumbing business
founded in 1996. We believe that SEHAC is overvalued by at least 30%.
Service Experts was formerly owned by Lennox, a multi-billion dollar HVAC company, trading under the
ticker LII. On March 22, 2013, ACAS purchased Service Experts for $15.1mm. ACAS currently values
Service Experts as a $153mm company on its books a 10x gain in the span of 2.5 years.
How Service Experts elevated to a 10-bagger so quickly is a mystery. ACAS provides almost no
information on an investment which by all accounts should be a cause clbre for the asset manager. By
the time Service Experts was sold to ACAS, it had already been on the chopping block for six months.
Leading up to the disposal, Service Experts reported declining revenue and growing operating losses:

Service Experts ($mm)

Source Lennox SEC filings, with operating losses adjusted for non-operational losses/gains.
Following the purchase, Scott J. Boxer was brought in by ACAS to help with Service Experts turn-around.
Mr. Boxer previously worked at Lennox as the CEO of Service Experts from 2003 until retiring in 2010.
Upon his return, Mr. Boxer acknowledged that Service Experts was on the decline in an interview:

We made Service Experts a very successful business. It was one of the most respected contracting
groups in North America, and after I left, it seemed to lose some of that luster.

Using public information, we have attempted to work our way backwards into ACAS $153mm valuation
of Service Experts. When ACAS acquired Service Experts, it had 108 locations in the US and Canada and
$385mm in sales, or $3.6mm in per-store annual sales. Service Experts location finder shows that today
there are only 64 locations in the US and 15 in Canada, representing a store count decline of 27%:

-7-

We referred to a LinkedIn profile of Bryan Benak, the VP and GM of US operations at Service Experts, to
determine current per-store sales:

-8-

Bryan Benaks profile states $290mm in sales from 67 service centers, or $4.3mm per store. We take this
figure as recent given that the store count of 67 is close to the current US store count of 64. At 79 total
stores it means $341mm in sales. However, 15 of the 79 locations are based in Canada, representing
19% of the companys store count. When ACAS acquired Service Experts, the Canadian dollar was
trading at par. Since that time, the Canadian dollar has collapsed in tandem with low commodity prices,
and is now trading at ~0.75 cents per $. With the necessary FX adjustments, our estimated total
company sales decline to $326mm.
Our analysis ignores growth-through-acquisition because M&A strategies generally take years to
translate to material earnings accretion, and we are focused on earnings. On earnings, when Lennox
sold Service Experts, the company was loss-making. However, the industry that Service Experts operates
in is a low-margin business, which we define as 1-3%. Our analysis assumes Service Experts returned to
profitability at the midpoint of 2%. $326mm in sales translates to net income of $6.5mm.The ownership
structure is not disclosed but Mr. Boxer personally owns 10% of the company. Our analysis assumes the
rest of management owns another 5%, leaving the balance of 85% owned by ACAS, which pro-rates
income to $5.5mm.
At a marked value of $153mm, this values Service Experts at 28x earnings. We dont think a rather
obscure company in a highly competitive industry with near-zero margins should be trading at a
premium to the S&P which trades at 19.4x (we had difficulties finding a more relevant benchmark
because most small-cap indexes are skewed by the high valuation of biotech stocks). In addition, Service
Experts is a private, highly illiquid investment, which are generally applied an illiquidity discount of 2030%. If we simply value Service Experts in line with the S&P, and apply 20% illiquidity discount, we value

-9-

ACAS ownership in the company at $86mm. This represents a 44% markdown from the current book
value of $153mm.

Bellotto Holdings
Bellotto Holdings (Bellotto) is a UK company that manufactures and retails blinds and curtains through
its operating subsidiaries. Bellotto is ACAS third largest investment, with a cost basis of $136mm and a
fair value of $161mm. However, we believe that Bellottos valuation is likely a result of ACAS selfdetermined and seemingly arbitrary valuation premiums and is overstated by 39%. There are also
transactions between Bellotto and the wives of directors which undermine our confidence in corporate
governance policies.
In 2013, Bellotto was valued at a ~50% discount to cost basis. In 2014, ACAS doubled Bellottos value to
a stunning $140mm.

Bellotto Holdings ($mm)

Source ACAS SEC filings.

Its worth reiterating that Bellotto is a drapes and curtains manufacturer and retailer and not the next
Silicon Valley unicorn. To get a better understanding of what happened in 2014 that justified this markup, we consulted Companies House. As a UK company, Bellotto files publicly-accessible financial
information with the government through Companies House. Bellottos consolidated income statement
for fiscal 2014 and 2013 are shown below:

- 10 -

Source Companies House

We see nothing in the income statement that would justify Bellottos 100% mark-up. There was 21%
growth in revenue, but Bellotto acquired two relatively small companies in 2014, which accounted for
about a quarter of that growth. Bellotto is also loss-making. Bellotto is also encumbered with a heavy
debt load which has pushed shareholders equity negative (net liabilities), as evidenced from its balance
sheet:

- 11 -

Source - Companies House

Equipped with financial statements, we worked backwards into ACAS valuation to determine the
reasonableness of the fair value mark. Our analysis values Bellotto on an EV/EBITDA basis to account for
its debt and negative earnings. Our analysis suggests that ACAS valued Bellotto at 11.4x EV/EBITDA at
year-end 2014:

Bellotto Valuation ( 000s)

Source our analysis using Companies House and SEC filings. FX rate of 1.56 to convert from $ to .

- 12 -

Bloomberg data shows that the UK FTSE 100 benchmark trades at an EV/EBITDA of 8.9x. Its asinine that
Bellotto is valued at such a premium to the FTSE 100, particularly because it is yet another small, highly
illiquid company that deserves an illiquidity discount.
Generously benchmarking Bellotto to 9x EV/EBITDA and assuming the face value of $36.5mm for the
preferred shares leaves us to value common equity holdings at $49mm, or a 52% haircut to ACAS
$103.6mm year-end mark. Our analysis values the combined position at $86mm, or 39% below the
140.1mm fair value ACAS reports.
In addition to the bloated valuation, most public companies have robust governance practices and are
rarely seen entering into loan agreements with the wives of directors. According to note 28 of Bellottos
financial statements, Bellotto had Payment in Kind (PIK) loans due to the wives of two directors:

Source Companies House

It is highly questionable that ACAS allows its majority-controlled portfolio companies to engage in these
types of loans with the family member of directors. We doubt investors would view this as conduct
worthy of a market premium. While we have yet to find anything in our analysis to justify the 2014
mark-up in terms of fundamentals, we did find some more Level 3 pixie dust at work. In 2013, the fair
value measurements of ACAS Level 3 equity investments had multiple discount of between -65% to 0%
compared to public companies as per page 101 of the 2014 10-K:

- 13 -

In 2014, that discount range was revised upwards from -55% to a shocking premium of 35%:

In addition, the average discount rate was lowered and the average control premium was raised. Its
shocking how fluid the valuation guidelines at ACAS are when it comes to Level 3 assets. The idea that
ACAS decides to use a maximum control premium of 21% which results in an average control premium
of 13% for owning >50% of an asset is incredulous. If ACAS fails to exit Bellotto at its marked value, we
remind investors that it was the Board of Directors that signed off on these farcical premiums.

- 14 -

American Capital Asset Management

American Capital Asset Management, LLC (ACAM) represents ACAS largest investment, with a current
cost basis of $456mm and a fair value of $1.1bn. ACAM represents 15.7% of ACAS total investments at
fair value and is a wholly-owned company through which ACAS conducts its fund management business.
We think ACAM is the most egregious of ACAS investments in terms of inflated assets, and value it at
$442mm, or less than half its current stated value. ACAS encourages the investment community to view
ACAM through its adjusted EBITDA figure, which was $93mm in 2014:

Source ACAS Q4 presentation

ACAMs $1.1bn valuation implies an 11.83x multiple using the provided adjusted EBITDA figure. Looking
to ACAMs income statement we see something completely different:

Source ACAM financial statements

ACAM reported $26.9mm of net income in 2014, barely up from the year-ago period. On a P/E basis,
ACAM is being valued at 41x earnings.

- 15 -

The delta between net income and EBITDA is largely derived from stock based compensation that ACAS
removes in its calculation of adjusted EBITDA. In the asset management business, and in particular at
ACAM, stock based comp is a consistent and large portion of expenses and should not be removed from
EBITDA when attempting to get a clear picture of the underlying business:

This concern was raised on the Q414 conference call by the Wells Fargo analyst:

Jon Bock Wells Fargo Securities:

Okay. So it also says that there are a few adjustments to that EBITDA number, and we've seen a good
amount of it in ACAM, stock-based comp as a part of items that, while we understand those might be
one-time items, they've been rather consistent over the last three years or so and in rather sizable
amounts. So one, are you adding back that stock-based comp to that $28 million per quarter run rate,
and if so, what can we think about stock-based compensation at ACAM, because that dramatically
affects profitability?

Aggitating this issue is that the large stock option grants include options on ACAM stock. On the Q213
conference call, management made the following comments when asked about the nature of ACAMs
stock options expense:

John Erickson (ACAS CFO):

Stock-based compensation would be in stock. So it would be in Agency and MTGE stock and I think some
of that compensation would actually be in ACAM stock.
Malon Wilkus (ACAS CEO):
Yes, that's correct.

We are at a loss to understand how ACAM can be 100% owned by ACAS as is claimed, and at the same
time also subject to stock options, which are implicitly designed to give ownership interest. If some sort
of compensation scheme is used to immediately buy back the ACAM options to maintain 100%
ownership, then those would be tantamount to cash expenses that should certainly be included in the
EBITDA figure. If, on the other hand, ACAM options are not immediately bought back, then ACAS has no
- 16 -

basis to claim that it is the 100% owner of ACAM and should reduce this investment on its balance sheet
accordingly.
Asking the market to value ACAM on managements version of EBITDA is asinine. For example, a June 7,
2015 Goldman Sachs report on traditional asset managers used a P/E approach to valuation, and so does
a November 17, 2015 report on Medley Management, a BDC:

The most directly comparable companies that manage listed REITs and BDCs are MDLY, ARES, and
NSAM, none of which trade above 14x earnings. Allowing ACAS self-determined 13% control premium
to public comps, and using the highest possible valuation of 14x gives us a 16x earnings multiple. On

- 17 -

$26mm in net income we value ACAM at a $411mm valuation which represents a 62% markdown to the
stated value of $1.1bn.

The Exit Game

Over the years, a number of large investments have simply been exited via transfers between parties
managed by ACAM/ACAS. In order to understand ACAS private equity fund business, we need to go back
to 2006-2007 to look at the creation of ACE I and ACE II. These funds are raised with third-party capital
but managed by ACAS/ACAM. Substantially all of the assets that went into those funds were simply
portions of ACAS portfolio companies. From page 10 the 2006 10-K filings:

ACE I is a newly established private equity fund with $1 billion of equity commitments. On October 1,
2006, we entered into a purchase and sale agreement with ACE I for the sale of approximately 30% of
our equity investments (other than warrants issued with debt investments) in 96 portfolio companies
for $671 million. ACE I will co-invest with American Capital in an amount equal to 30% of our future
equity investments until the $329 million remaining commitment is exhausted.

From page 46 of the 2007 10-K filing:

In October 2007, we sold approximately 17% of our equity investments in 80 portfolio companies for
an aggregate purchase price of $488 million to ACE II. ACE II is a private equity fund with $585 million of
equity commitments from third party investors. The remaining $97 million equity commitment will be
used by ACE II to fund add-on investments in the 80 portfolio companies. American Capital, LLC is the
manager of ACE II. In addition, 10%, or $58.5 million, of the $585 million of equity commitments are
recallable for additional co-investments with American Capital once they have been distributed to the
third party ACE II investors.

ACAS exited ~$1.2bn of its portfolio by selling them to ACE I and II, which are managed by ACAS/ACAM.
Just take a moment to think about that. And as if to support our point, a review of the Q408 conference
call transcript reveals the ACAS CEO brazenly making the following statement:

So I think that were expecting, a lot of the liquidity is being generated not only from portfolio
companies being sold, but also you take like the ACE II transaction, thats another example of how we
generate liquidity in the portfolio, where you go out and raise a private equity fund and sell a bunch
of your investments.

This admission is shocking in its absurdity. What kind of business model is this? Still, the shady nature of
these transactions could be overlooked if ACE I and ACE II were able to exit their investments to truly
independent third parties, while earning a reasonable rate of return. Yet ACAS bought back $145mm of
these investments in 2015, and then marked them down by $19mm, or 13% as explained on page 62 of
the 10-K:
- 18 -

On June 30, 2015, we entered into stock purchase agreements with American Capital Equity I, LLC
(ACE I) and American Capital Equity II, LP (ACE II) under which we acquired secondary and add-on
investments in 24 portfolio companies for an aggregate purchase price of $145 million. The initial
purchase price for such investments was based on the fair value of the securities as of March 31, 2015,
but is potentially subject to increase on June 30, 2016 as a result of certain post-closing adjustments. For
the three and nine months ended September 30, 2015, we recorded $6 million and $19 million of
unrealized depreciation on these securities, respectively, which is included in net unrealized
(depreciation) appreciation in our consolidated statements of operations.

Its important to reiterate that ACAS exited a number of its investments into ACE I and II, and then
bought a portion of them back only to write them down!
To explain why ACAS would buy back old investments, the CEO justified it as a 40 Act regulatory
requirement for the planned spin-off. (s) Although we find this doubtful (because the CEO points to no
specific regulation or guidance related to the 40 Act, because it would have rendered all the previous
ACE transactions unallowable, and because a professional we consulted said he believes there are no
issues with BDC co-investments as long as they are properly documented), our focus is not on the
buybacks so much as the immediate write-downs that followed. These write-downs lead us to believe
that the investments that ACE I and II purchased from ACAS were inflated.
As supporting evidence of our view, we point to a Wells Fargo research report published on 11/5/15
which states ACE II investors felt that they had overpaid for ACAS equity assets prior to the financial
crisis. This complaint likely stems from performance. Based on our calculations, ACE I, and in particular
ACE II have performed poorly relative to the S&P in their respective timeframes. We use information
from page 10 of the 2014 10-K filings to estimate fund performance:

($mm)

- 19 -

ACE III
In mid-2015, ACAS raised $1.1bn for the ACE III fund. ACAS unloaded seven investments into the fund
following the raise, plus sold an option to acquire an eighth. From the 2014 10-K filing:
On April 28, 2014, we completed a $1.1 billion private placement of partnership interests in American
Capital Equity III, LP (ACE III or the Fund), a new private equity fund focused on investing in U.S.
companies in the lower middle market. Concurrent with the private placement, we entered into a
Contribution and Redemption Agreement with the Fund pursuant to which we agreed to contribute
100% of our equity and equity-related investments in seven portfolio companies (Affordable Care
Holding Corp., Avalon Laboratories Holding Corp., CIBT Investment Holdings, LLC, FAMS Acquisition, Inc.,
Mirion Technologies, Inc., PHI Acquisitions, Inc. and SMG Holdings, Inc.) to the Fund and to provide the
Fund with an option to acquire our equity investment in WRH, Inc. (the Equity Option), in exchange for
partnership interests in the Fund. Collectively, the eight portfolio companies (including WRH, Inc.
assuming the Equity Option is exercised) comprise the Secondary Portfolio for ACE III.
The aggregate value of the sale was $640mm. Unlike ACE I and II, we dont believe ACAS sold inflated
investments to ACE III. We actually think the investments were sold at a substantial discount. As we
outline later, we believe ACE III was set up to disproportionately enrich management through
performance fees.
A year within acquiring Avalon, Mirion, and Affordable Care Holdings Corp (ACHC) these three
investments were flipped by ACE III for a considerable return, which we believe was a way for
management to enrich themselves, while robbing shareholders of over $500mm.

Avalon: Avalon was sold to ACE III on April 28, 2014. ACAS does not disclose the exact sales
price, but ACAS balance sheet shows a gross reduction of $78.4mm related to its control investment
(>50% ownership) in Avalon. On August 4, 2014, Nordson announced that it would acquire Avalon for
$180mm. While the press release does not reveal the exact ownership interest that ACE III sold, a read
through Nordsons 2014 10-K filing discloses that Nordson has an Agreement and Plan of Merger
which names ACE III as the only outside party. Therefore, we think its fair to assume that ACE III fully
owned 100% of Avalon. According to our estimates, ACE III generated a return of 130%1 on Avalon by
buying and flipping the investment in the span of 3 months. We find it pretty amazing that a corporate
acquirer was able to source, complete due diligence and follow through with an investment so fast. This
begs the question: was the acquisition of Avalon already lined up by ACAS management before
Avalon was sold to ACE III?

Mirion: Mirion was sold to ACE III in 2014. ACAS does not disclose the exact sales price, but
ACAS balance sheet shows a gross reduction of $189mmrelated to its 58% stake in Mirion. In April 2015,
1

(180/78.4 - 1)

- 20 -

Mirion was sold to Charterhouse Capital Partners for $750mm. This values the 58% stake at $435mm,
which means a return of ~130%2 in less than a year.

ACHC: ACHC was sold to ACE III in Q314. ACHC was then flipped by ACE III to Berkshire Partners
in September 2015 for over $850mm. An analysis by Wells Fargo demonstrates that this netted ACE III a
stunning 1-year return of ~125%:

Source Wells Fargo Securities 11/5/15

Why is ACE III performing so much better than its predecessors and how is it able to flip investments
months after their acquisition for mind-blowing returns? It turns out that ACE IIIs structure is unique.
From ACAMs financial statements:

The ACE III GP Non-controlling Interest [figures in 000s]

In conjunction with closing the ACE III transaction, certain employees of a subsidiary of the Company
(the Employee Investors) purchased an interest in ACE III GP (the ACE III Non-controlling Interest)
and committed to investing $4,500 in ACE III GP, which is to be used to fund a portion of the ACE III
Investment Commitment. In addition to pro rata participation in the returns from the investments of
ACE III, the ACE III Non-controlling Interest also allows the Employee Investors to participate in any

(435/189 - 1)

- 21 -

incentive fees earned by ACE III GP and, at the discretion of the Company, a portion of the distribution
of any earnings of the ACE III GP.

This excerpt lays it all out. ACE III was structured in a way in which its not managed by ACAM directly,
but by an entity called ACE III GP. ACAS and its shareholders only control a portion of ACE III GP, and
thus only collect a portion of the management fees. Employees (read: management) controls the other
portion of ACE III GP. Instead of having to share the management fees from ACE III with shareholders,
management gets to dip into them right away:

This creates the perfect incentive for management to sell ACAS investments on the cheap to ACE III, and
then have ACE III flip those investments for huge gains in order to generate performance fees. In
aggregate, it appears that the ACE III transactions have deprived ACAS shareholders of over $500mm!
Effectively, management set up a structure which we believe deprived shareholders of an amount equal
to greater than 10% of its market capitalization to generate fees for themselves.
This is pretty outrageous behavior, and reminds us of Focus Media, a former NASDAQ-listed company
that was recently fined by the SEC in connection with having sold securities in a subsidiary to certain
insiders, months before insiders sold their interests to a private equity firm at nearly six times the price
that insiders had paid. The SEC press release can be found here.

- 22 -

The Spin-On/Off and Pro Forma Wishful Thinking

ACAM plays a pivotal role in ACAS spin-off proposal. Under the proposal, ACAS plans to spin off all its
debt and equity assets, excluding ACAM, into a newly created BDC. ACAM will remain with ACAS and
manage the single, newly created external BDC for a fee. ACAS released pro forma projections of
earning assets under management (EAUM) post spin.

According to this slide, EAUM is projected to grow at a CAGR of 10% over the next three years compared
to actual CAGR of 22% over the last five. This sounds conservative except that the actual CAGR
calculation presented by management includes the critical 2010-2012 post recession period when ACAS
raised funds for two REITs it manages. A more relevant comparison period for the next three years are
the last three, wherein EAUM only grew at a CAGR of 8%.
- 23 -

Digging into the weeds of the pro forma projections highlights the wishful thinking that is required to
believe these numbers. By Year 3, REIT EAUM is expected to grow 26% from $10.2mm to $12.9mm. This
is where the bulk of projected EAUM comes from. REIT EAUM is also projected to provide the highest
margins in year 1 at 80% compared to 75% for BDCs and 39% for Private Funds. ACAM manages two
REITs, both which are public and trade under AGNC and MTGE. ACAM earns a base management fee on
AGNCs and MTGEs shareholders equity at 1.25% and 1.5%, respectively (with some adjustments). Fees
are directly tied to the rise and fall of AGNCs and MTGEs shareholders equity balances. The problem is
that both AGNC and MTGE have fallen apart and their stocks are trading at multi-year lows.

- 24 -

The drop in AGNC is extra painful because AGNCs shareholders equity represents ~90% of REIT EAUM.
In this environment it will be impossible for ACAM to raise additional REIT funds, particularly when
AGNC and MGTE are currently priced to yield 14% and 11% respectively.

The Elliott Proposal

A number that has recently started being thrown around is a $23 price target for ACAS. This is the high
case scenario that Elliott Capital Management prescribes to its proposal. Elliott believes the best way to
unlock value is to stop the spinoff because it will destroy shareholder value. We agree. Unfortunately,
we also view Elliotts proposal as flawed and unrealistic because their projections are based on figure
from ACAS, which we believe have zero credibility. We believe that investors should view Elliotts $23
price target with extreme caution.

Source Elliott proposal

Elliotts valuation is built from key inputs that are taken or derived directly from ACAS. Management
Fee Revenue of $248mm, is just the sum of the pro-forma fees assumed by ACAS from REITs fees
($127mm) and private funds fees ($50) in year 1, plus 3% of NAV ($2,366x3%), which again is derived
from figures presented by ACAS. From the Elliott presentation:

Service Experts and Bellotto are prime examples of how unreliable ACAS NAV values are, and we
believe the term garbage-in, garbage-out applies here.
- 25 -

Conceptually, Elliott wants to vote against the spin-off proposed by ACAS. We believe that the biggest
difference between the Elliott proposal and the ACAS proposal is the ownership of the BDC assets. In the
ACAS proposal, all the debt and equity of ACAS is spun off as a separate BDC, and ACAS/ACAM
consolidate as an asset manager business and generate management fees from the spinCo. Our read of
the Elliott proposal is that the structure stays the same as it is today, but some of the BDC portfolio is
sold to raise cash and buyback shares, while the rest of the BDC assets enter an asset management
agreement with ACAM and pay fees. This explains why the NAV figure of $2,366 appears twice in the
valuation 1) once as a function of the Management Fee Revenue line and 2) again as part of
consolidated NAV. Essentially, we believe Elliott is advocating that ACAS just takes the assets it already
owns, enters into a management contract with ACAM, and generates fees on those assets. We see this
as moving a dollar from the left pocket to the right pocket through a management agreement and
applying a multiple to the transaction.
In the ACAS proposal, it would be up to the market to value ACAM directly. In the Elliott proposal, we
believe it would be up to ACAS to value ACAM and tell the market what it is worth, which is just a
doubling down of the Level 3 subjectivity that already plagues ACAS.
Elliott probably (rightly) knows that ACAS missed the YieldCo party. Way back when the ACAS spin was
contemplated in 2014, the YieldCo phenomenon was in full swing. Companies, taking a cue from MLPs
began to create YieldCo assets, which they would then manage. Because investors expected that
Yieldcos would trade at low dividend yields due to low interest rates, the YieldCos would raise tons of
equity that would be used to buy assets from the manager. The manager would then claim a fee on
these assets which would continue to grow as the manager rinsed and repeated. Unfortunately,
investors started applying bigger discounts to YieldCos, and the party ended.
The most blatant case of this is SUNE another hedge fund holding.
When the YieldCo trick doesnt work

- 26 -

 the asset manager falls apart too.

Other examples include NSAM and NRF

- 27 -

 and RESI and AAMC.

We believe Elliotts proposal attempts to derive the benefits of a YieldCo structure without actually
creating the actual YieldCo.

- 28 -

Valuation
We value ACAS at $8.97 a share from the last closing price of $14.16 and see 37% downside. As of
Q315 ACAS reported $7.1bn in total assets of which $4.5bn were classified as Level 3 assets. We give a
5% discount to the Level 2 assets in line with the street, and value ACAM at the previously stated
$411mm and apply a 50% discount to all other Level 3 assets. We also apply a 5% regulatory discount on
the NAV because we view the nature of the ACEIII transactions as horrid.

Our value of ACAS ($mm, except for NAV/Share)

Source our analysis and SEC filings. Model does not include DTA.
Our 50% discount for all other Level 3 assets reflects our analysis of SEHAC, Bellotto, and ACAM and
what we perceive to be highly inflated book values. We simply do not trust management to be objective
and fair. The reason we apply a discount to the entire Level 3 category instead of each asset class, be it
equity or debt, is because ACAS often restructures its investments, moving from one asset class to
another, which makes consistency impossible. In addition, ACAS applies an average control premium of
15% to its senior debts, which is outlandish. From page 100 of the 2014 10-K:

- 29 -

Even without the issues raised in this report, ACAS has traded at a persistent ~30% discount to stated
NAV over the years, which is the markets own way of handicapping ACAS assets.
One does not need to agree with our opinions. There simply is no better vindication than to look at
insider transactions.

Insiders have dumped the stock of ACAS basically EVERY SINGLE MONTH. There are almost too many
arrows in the above chart to tell, so lets look at a table:

- 30 -

Quite literally, not more than 2 weeks have gone by this year (except in June, because even insiders
apparently take a few days off in the summer) without an insider of ACAS perfectly happy to dump his or
her shares at a significant discount to NAV.
This may be the one instance where we think it might be worth trusting the actions of ACAS
management.

- 31 -