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
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
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.