News Notes October 2009

Allied Capital–End of an Era, End of a Local Institution. In October, Allied Capital Corporation (NYSE:ALD) announced that it was selling to Ares Capital Corporation in NYC (NASDAQ:ARCC).  Thus ends one of the most storied finance companies in the region—a company whose origins pre-date almost all of us who have benefited from having this expertise in the region. George Williams, who is in his 80’s, founded the company fifty years ago and took it public shortly thereafter.  Allied was a clear pioneer in the realm of small business and mezzanine lending.  Besides spearheading a whole new asset class, it is probably fair to say that Allied professionals invented and refined numerous lending practices and techniques that have spread through the industry.  Scores of industry professionals cut their teeth at Allied or in its portfolio companies.  Prominent among them in this region include David Gladstone and Chip Stelljes at Gladstone Capital, Will Dunbar at Core Capital and Jon Ledecky who was hyper-active locally in the last decade.  These are among the positive things that can be said about Allied.  Over the years, Allied has had or created more than its share of problems.  First of all, like Drexel in its heyday, no one should ever confuse Allied with your friendly neighborhood banker.  Mezz lending is a tough jungle to survive in, and it gets more dangerous when you concentrate on the smaller end of the market.  Allied people learned early on that you had to exact tough terms from companies, so tough they were.  Then, in the past decade, Allied has had institutional and regulatory problems in how it accounted for its assets which created a rescue situation and probably made the company’s sale inevitable. The sale of Allied looks pretty good on the surface—$648M paid which represent a 27% premium on Allied Stock.  Unfortunately, this is another example of a trend we described in last month’s Deal News (see Sept. Mid-Atlantic Deal Review, Deal Notes,“SkyTerra”).  A premium on a stock that has fallen off a cliff is not much of a premium.  For most of the past decade, Allied traded between $20 and $30 per share.  It is selling to Ares for $3.47 per share.  As a postscript, we would like to list some of the names of those who passed through Allied or its portfolio companies, a list that flowed from the memory of Will Dunbar.  If you know of more, please feel free to add them through Comments to this note.  Cabell Williams and Susan Gallagher of Williams & Gallagher, still in D.C.  Randy Klueger with Will at Core Capital.  Phil McNeill of SPP Mezzanine Partners in Fairfax.  Mike Grisius, still local.  Tom Westbrook runs the Mezz/Buyout business at BB&T in North Carolina.  Erik Shott is a buyout partner in NYC.  Rob Edwards is in the buyout group of BofA.  Ed Ross runs a mezz fund out of Chicago.  Rick Fearon started a hedge fund in CT.  Shep Robinson is doing real estate workouts for Wells Fargo.  We are sure that the list is much longer.

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2 Comments

  1. Tom Noojin
    Posted November 30, 2009 at 8:10 pm | Permalink

    George Williams and the board obviously made the wrong decision on succession. Look at David Gladstone’s results vs Bill Walton’s. Gladstone has never been accused of manipulating the financial statements either. No matter what, you can’t take away the supurb job George Williams with Gladstone at his side did with Allied before turning it over to current management.

  2. David Gladstone
    Posted January 24, 2010 at 2:12 pm | Permalink

    Some items to note in your article. George Williams did not found Allied Capital. A fellow named George DeFranco founded it in 1959 and George was a minor officer in one of Defranco’s other companies. Around 1964 there was a tender offer for Allied Capital by some “gun slingers” from New York. DeFranco wanted to sell but Williams did not. Williams and Murry Toomey another board member of Allied, got major shareholders to vote no on the issue. One of the largest shareholders was Curtis Steuart. Since the tender did not go through the board removed Defranco and Steuart became Chairman and Williams president. The year before I arrived the company had about $10 million in assets with a large portion of that borrowed from the Small Business Administration. When I arrived in 1974 the fund had three employes, and the stock traded “by appointment.” Over the following years George and I had great fun building the company and doing deals. Some of the experiences we had are detailed in my book “Venture Capital Handbook.” I also worked on the 1980 act that created the BDC legislation and Allied became one of he first BDCs. Before I left the company and became Chairman of American Capital Strategies, Ltd. Allied had five public companies and three partnerships. It was a leader in the mezzanine lending industry with a stellar record for those who invested. It is sad to see a long running company with so many wonderful memories go out of existence.

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