Gladstone Investment Corporati GAIN
December 23, 2005 - 3:26pm EST by
2005 2006
Price: 13.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 225 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Here’s a very straightforward and, hopefully, uncontroversial investment idea that rests on an amazingly simple notion: that a pile of cash resting anxiously in a pass-through entity that trades below book and is managed by a recognized investment expert (nay, legend) is a worthwhile investment.

The company is Gladstone Investment Corporation and the investment expertise behind it is David Gladstone. Yes, David Gladstone...he of Allied Capital, American Capital Strategies, Gladstone Commercial (GOOD), Gladstone Capital (GLAD) and “Venture Capital Investing: The Complete Handbook” fame. Of course Mr. Gladstone (or perhaps his daughter, Laura) is also distinguished by having had some role in spreading the claptrap on Allied Capital that stoked the short community into action, but that’s another story for another time.

Gladstone Investment (GAIN) trades currently at $13.60, that’s after netting cash of $230.3 million, or $13.90 per share in its June 2005 IPO. There are 16.56 million shares outstanding for a current equity market capitalization of $225.2 million. The company is currently debt free and, at the last reporting period, had successfully invested approximately $40.5 million of its IPO booty in bank syndicated, variable rate senior secured term debt. Additional investments totaling $5 million of like investments were made subsequent to the end of the quarter. Finally, at 9/30/05 the company squatted on $183.8 million in cash equivalents.

At current, the shares trade at a modest discount to their NAV of $13.93. Woe is me! Interestingly, GAIN has declared and paid out monthly dividends, beginning 7/29/05, totaling $0.18. Isn’t that interesting?

The strategy going forward is right out of the Apollo Investment (AINV) playbook: 1) load up on highly liquid syndicated debt while scoping out more remunerative middle market mezzanine investment opportunities 2) after working through the cash hoard leverage the balance sheet 3) pay dividends early, and 4) raise more equity. In fact, GAIN turbocharged the algorithm by paying dividends monthly.

Management and incentive fees are a straightforward 2% and 20%, except that during the period prior to 3/31/06 the management fee amount will be calculated on assets net of cash and cash equivalents.

OK...let’s recap:

1) shares trade at a (minor) discount to NAV
2) management is creditable and accomplished
3) dividends have been paid almost from day one
4) the company is as yet unlevered, and
5) the fee is comparable to or slightly better than other BDC’s and private equity partnership arrangements.

Now, let’s take a quick walk around the BDC cabbage patch:

Price NAV Disc/Prem Yield
ALD $28.85 $17.37 66% 8.0%
ACAS $37.00 $23.34 58% 8.6%
AINV $18.45 $14.29 30% 9.5%
GLAD $21.68 $13.41 62% 7.6%
GOOD $16.50 $13.06 26% 7.4%
GAIN $13.60 $13.93 (2.3%) 3.5%

So, I ask...”what are you prepared to do?”.


1) Time and exposure
2) Continued investment in syndicated debt and mezzanine securities
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