March 08, 2011 - 10:31am EST by
2011 2012
Price: 21.98 EPS NM $2.50
Shares Out. (in M): 3 P/E NM 8.8x
Market Cap (in $M): 72 P/FCF NM 8.8x
Net Debt (in $M): 8 EBIT 6 8

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SAR is a business development corporation ("SAR") that is managed by Saratoga Partners, which is a middle market private equity firm that was originally part of Dillon Read.  SAR began life as GSC Investment Corp. (old ticker "GNV") which was the BDC affiliate of GSC Group.  GNV exceeded its borrowing limit on its credit agreement in mid-2009 and went into default.  Ultimately, the company agreed to a recapitalization in early 2010 in which Saratoga invested $15 million for a 37% stake in the company and Madison Capital Funding (an affiliate of New York Life) provided a new credit facility to replace the defaulted facility that had been provided by Deutsche Bank.  The investment assets of SAR consisted of investments in 26 portfolio companies and one CLO as of November 30, 2010.  These assets were marked at $91.2 million.  I think it is easy to justify the marks on roughly three quarters of the portfolio as shown in the table shown later in this write-up.  SAR trades at roughly 85% of NAV.  This means that if you buy the shares today you are getting the remainder (shown as "value hard to verify") of the portfolio at roughly 50% of the stated mark.  That said, I think an investment in SAR is attractive for a number of reasons:

  • 1. You get the assets at a discount to NAV.
  • 2. When Saratoga took over management of SAR, management's incentive compensation was set to be based on capital gains over the portfolio value as of 5.31.10. I suspect that those marks may be conservative where no obvious valuation metric exists.
  • 3. Saratoga's plan for SAR is to turn it into a conventional BDC with a meaningful yield and commensurate appeal to retail investors. If SAR trades accordingly, it should merit a multiple of 1.1x to 1.2x book. In order to get to that point SAR will need to exit some of its equity and low yield investments and reinvest in more traditional BDC-type senior and mezz positions. We think SAR should be able to earn 10% on book equity of roughly $25 per share. That equates to an 8.8x PE multiple at today's price. Most BDCs are in double digits.  ARCC, AINV, PNNT, SLRC, TCRD, GLAD BKCC are some of the comps to look at.

In all, I think the stock has 20% to 30% upside not counting dividends.  Downside should be limited.


The portfolio analysis is as follows:


Portfolio Company                  Value ($)         Notes


GFSI                                         5,227,000        Debt called (paid off) 11.1.10

Legacy Cabinets                      141,572           Value hard to verify

Hopkins Manufacturing          3,169,725        Just paid off the first lien...figure the 2nd lien should be money good...some upside to par

Targus Holdings First Lien      2,854,231        Mark is 97.5...2.24.11 bid is 99.25

Targus Holdings Unsec Notes 964,935           Value hard to verify

Targus Holdings Equity           2,851,650        Value hard to verify

CFF Acquisition                        257,318           Value hard to verify               

M/C Acquisition                      247,119           Value hard to verify

Advanced Lighting Tech          1,767,000        Saratoga Partners portfolio company...figure they should get the value of the loan right if they own the equity

Dekko Technologies                6,043,429        Value hard to verify

USS Parent                              2,646,985        Value hard to verify

Bankruptcy Mgmt Solutions   716,543           Just went through a recap...figure they should get the value right

DCS Business Services             1,600,000        New loan...figure it's still worth par

Big Train                                 1,542,711        Value hard to verify

IDI Acquisition                         3,800,000        Debt called (paid off) 2.26.11

PRACS Institute                       2,925,394        Value hard to verify

McMillin Companies              3,157,000        Value hard to verify

Worldwide Express                 2,433,814        Growth (per the website) would seem to indicate credit is ok

Jason Incorporated                 2,147,039        Industrial company with $100 million new acquisition initiative from sponsors...figure the loan is good

Specialized Technology Res    4,925,000        Mid cap public company...figure the loan is good

Elyria Foundry                         3,750,030        Value hard to verify

Abitibi                                      2,978,126        Matches market bid of 101

Grant                                       0

Energy Alloys                          0

Terphane                                 6,434,020        Reflects recent paydown...figure the value on the stub should be ok

Brown Publishing                    0

Network Communications      1,982,500       Consistent with broker mark

Penton Media                         3,613,843        Consistent with broker mark

CLO                                         23,037,967      22.5% discount rate used by SAR seems reasonable


Total                                        91,214,951


One potential concern with SAR is with management.  I have not been able to find out much about their private equity track record, so it's difficult to evaluate their investing skills.  In addition, from an IR standpoint, they are unhelpful.




Growth in NAV

Resumption of all cash dividends

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