American Capital Hatches Financial Services Group

In the wake of launching several other industry groups, American Capital Strategies (ACS) has launched its latest—a financial services group headed by former Wachovia banker Bob Grunewald.

ACS has been touting its strategy of becoming the only U.S. publicly traded manager of funds of private assets. One of its main arguments for doing so is that managers of public assets trade at higher earning multiples on the public market. ACS currently trades at around 9x, while managers of public assets trade at a median of 25x, according to ACS.

It launched its European Capital fund in 2005 and also expanded its investment focus in the technology and energy sectors within the last year by forming new industry-focused groups. European Capital, ACS’s first managed fund, now has $1.3 billion in capital resources. The aim with the financial services group, as well as the technology and energy group, is to eventually build up enough deal flow and assets to raise independent funds.

Grunewald broke down the firm’s focus in financial services into four segments: consumer finance, commercial finance, insurance and asset management. In his opinion the opportunity in this space is large, as “financial services is probably the largest segment of the U.S. GDP.” Within financial services, ACS will be doing buyouts and minority stake investments. The firm, up to this point, has already invested $307 million in six financial services companies.

Grunewald’s 15 years in the industry includes leading the financial services M&A group at Nations Bank, which eventually merged with Wachovia. There, he led the specialty finance investment banking practice.

The new opportunity appealed to Grunewald because of the firm’s ability to be flexible as it relates to the scope of transactions. Most private equity firms want a controlling stake and banks want to provide senior debt, he said. ACS, by contrast, can take a minority position and provide subordinated debt. He added that there is very little subordinated debt available to middle market financial services companies and few subordinated debt lenders with any sophisticated understanding of the industry.

One of the advantages within financial services, said Grunewald, is that the returns are often not as high, but the risk on those returns is much lower. “It’s a complicated sector,” he added, noting that companies aren’t analyzed on multiples of EBITDA, and they typically require a good deal of monitoring post investment.

ACS will also be looking to back businesses started by management teams that spin out of companies consolidated by mergers. “One of the challenges for financial services companies is looking for growth capital,” he said. “It’s difficult for them to raise money. Most private equity firms look at that as venture capital, but in financial services it’s different than venture capital, because experienced management teams can ramp up very quickly.”

Right now Grunewald is trying to build out his team, of which he is currently the only member. —M.C.