10-K 1 acas10k123115.htm FORM 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2015
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 814-00149
 
 
AMERICAN CAPITAL, LTD.
(Exact name of registrant as specified in its charter)
Delaware
 
52-1451377
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
2 Bethesda Metro Center
14th Floor
Bethesda, Maryland 20814
(Address of principal executive offices)
(301) 951-6122
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange
on which registered
Common Stock, $0.01 par value per share
 
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
 
Securities registered pursuant to section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o    No  x.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o    No  x.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act.
Large accelerated filer  x
 
 
 
Accelerated filer  o
Non-accelerated filer  o
 
(Do not check if a smaller reporting company)
 
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No.  x
As of June 30, 2015, the aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was approximately $3.6 billion based upon a closing price of the Registrant’s common stock of $13.55 per share as reported on The NASDAQ Global Select Market on that date. (For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant and certain other shareholders; such an exclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the registrant.)
 
As of February 1, 2016, there were 239,350,681 shares of the Registrant’s common stock legally outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant’s definitive proxy statement for the 2016 Annual Meeting of Stockholders are incorporated herein by reference into Part III hereof. If such definitive proxy statement is not filed within 120 days after December 31, 2015, the information called for by Part III will be filed as an amendment to this Form 10-K not later than the end of the 120-day period.
 
Certain exhibits previously filed with the Securities and Exchange Commission are incorporated by reference into Part IV of this report.
________________________________________________________________________________________________________________________



AMERICAN CAPITAL, LTD.
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II.
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III.
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV.
 
 
 
 
Item 15.
 
 
 


2


PART I.
 
Item 1.
Business
General
American Capital, Ltd. (which is referred to throughout this report as “American Capital”, “we”, “our” and “us”) is a publicly traded global asset manager and private equity firm. American Capital, both directly and through its asset management business, originates, underwrites and manages investments in middle market private equity, leveraged finance, real estate, energy and structured products. It is our practice to sell some of the assets that we originate as an investor into funds that we manage. On August 29, 1997, we completed an initial public offering (“IPO”) and became a non-diversified closed end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). As a BDC, we primarily invest in senior and mezzanine debt and equity in buyouts of private companies sponsored by us (“American Capital One Stop Buyouts®”) or sponsored by other private equity funds and provide capital directly to early stage and mature private and small public companies (“Sponsor Finance and Other Investments”). We also invest in first and second lien floating rate loans to large-market U.S. based companies (“Senior Floating Rate Loans” or “SFRL”) and structured finance investments (“Structured Products”), including collateralized loan obligation (“CLO”) securities and commercial mortgages and commercial mortgage backed securities (“CMBS”). Our primary business objectives are to increase our net earnings and net asset value (“NAV”) by making investments with attractive current yields and/or potential for equity appreciation and realized gains and by growing our fee earning assets under management.
As of December 31, 2015, we managed $21 billion of assets, including assets on our balance sheet and fee earning assets under management by affiliated managers, with $73 billion of total assets under management (including levered assets). Our asset management business is conducted through our wholly-owned portfolio company, American Capital Asset Management, LLC (“ACAM”), a registered investment adviser under the Investment Advisers Act of 1940. As of December 31, 2015, ACAM managed the following funds:
American Capital Agency Corp. (“AGNC”)
American Capital Mortgage Investment Corp. (“MTGE”)
American Capital Senior Floating, Ltd. (“ACSF”)
American Capital Equity I, LLC (“ACE I”)
American Capital Equity II, LP (“ACE II”)
American Capital Equity III, LP (“ACE III”)
European Capital UK SME Debt LP (“ECAS UK SME Debt”)
European Capital debt fund (“ECAS debt fund”)
American Capital CLO Fund I, LP (“ACAS CLO Fund I”)
ACAS CLO 2007-1, Ltd. (“ACAS CLO 2007-1”)
ACAS CLO 2012-1, Ltd. (“ACAS CLO 2012-1”)
ACAS CLO 2013-1, Ltd. (“ACAS CLO 2013-1”)
ACAS CLO 2013-2, Ltd. (“ACAS CLO 2013-2”)
ACAS CLO 2014-1, Ltd. (“ACAS CLO 2014-1”)
ACAS CLO 2014-2, Ltd. (“ACAS CLO 2014-2”)
ACAS CLO 2015-1, Ltd. (“ACAS CLO 2015-1”)
ACAS CLO 2015-2, Ltd. (“ACAS CLO 2015-2”)
We are taxed as a corporation and pay federal and applicable state corporate taxes on our taxable income. From 1997 through the tax year ended September 30, 2010, we were taxed as a regulated investment company (“RIC”), as defined in Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, we were not subject to federal income tax on the portion of our taxable income and capital gains we distributed to our shareholders, but we were also not able to carry forward net operating losses (“NOL”) from year to year. Beginning with our tax year ended September 30, 2011, our status changed from a RIC subject to taxation under Subchapter M to a corporation subject to taxation under Subchapter C. Under Subchapter C, we are able to carry forward any NOLs historically incurred to succeeding years, which we would not be able to do if we were subject

3


to taxation as a RIC under Subchapter M. This change in tax status does not affect our status as a BDC under the 1940 Act or our compliance with the portfolio composition requirements of that statute.
In October 2014, the Securities and Exchange Commission (“SEC”) Division of Investment Management issued SEC IM Guidance Update No. 2014-11, Investment Company Consolidation (“IM Update 2014-11”), which recommends that BDCs consolidate wholly-owned subsidiaries when the intent of the subsidiary is to act as an extension of the BDC’s investment operations and to facilitate the execution of the BDC’s investment strategy. In October 2014, our Board of Directors approved the spin-off of two new publicly traded BDCs to our shareholders, separating the majority of our investment assets from our asset management business. The approval also marked a change in our intent with respect to European Capital Limited (“European Capital”), which we no longer consider a vehicle for third-party capital but rather is viewed as an extension of our investment operations. In accordance with IM Update 2014-11, effective October 1, 2014, European Capital's financial results have been consolidated with the financial results of American Capital.
Recent Developments
On November 25, 2015, we announced that our Board of Directors instructed us to undertake a full strategic review of all alternatives with Goldman Sachs & Co. and Credit Suisse Securities (USA) LLC as our financial advisors to assist in this review. The strategic review considered all alternatives for maximizing shareholder value, including a sale of our company or our various business lines in whole or in part. On January 7, 2016, we announced that our Board of Directors completed the initial phase of our strategic review process and authorized us to proceed with the solicitation of offers to purchase our company or our various business lines in whole or in part. Goldman Sachs & Co. and Credit Suisse Securities (USA) LLC are assisting with the solicitation of offers.
Investment Portfolio
As an investor, we primarily invest in senior and mezzanine debt and equity of middle and large market companies. We and ACAM also invest in assets that can be sold or contributed to public or private funds that ACAM could manage, as a means of “incubating” such funds. We also have investments in Structured Products and in funds managed by us.
In 2015, we have committed $3.3 billion of capital to new investments, composed of $2.2 billion of debt securities, $673 million of equity securities and $378 million of Structured Products investments. Of the $3.3 billion of new investment commitments over the last year, $1.1 billion was committed to Senior Floating Rate Loans, $823 million was committed to new Sponsor Finance and Other Investments, $378 million was committed to new Structured Products, $367 million was committed to European Capital’s investment portfolio, $339 million was committed to add-on investments in our existing portfolio companies and $254 million was committed to ACAM, primarily for fund development. In 2015, we received $3.7 billion of cash realizations, composed of $3.3 billion of debt realizations and $390 million of equity realizations. In addition, in 2015, our investment portfolio has generated operating revenue, net operating income before income taxes and net loss of $671 million, $378 million and $(187) million, respectively. In 2015, our weighted average net operating income return on shareholders’ equity was 4.8% and our weighted average net loss return on shareholders’ equity was (3.5)%.
Over the last three years, we have committed $8.0 billion of capital to new investments, composed of $5.5 billion of debt securities, $1.5 billion of equity securities and $1.0 billion of Structured Products investments. Of the $8.0 billion of new investment commitments over the last three years, $3.0 billion was committed to Senior Floating Rate Loans, $1.6 billion was committed to new Sponsor Finance and Other Investments, $27 million was committed to new American Capital One Stop Buyouts®, $1.0 billion was committed to new Structured Products, $1.1 billion was committed to add-on investments in our existing portfolio companies, $406 million was committed to European Capital’s investment portfolio and $893 million was committed to ACAM, primarily for fund development. Over the last three years, we received $7.7 billion of cash realizations, composed of $5.1 billion of debt realizations and $2.6 billion of equity realizations. In addition, over the last three years, our investment portfolio has generated operating revenue, net operating income before income taxes and net earnings of $1.6 billion, $793 million and $431 million, respectively. Over the last three years, our weighted average net operating income return on shareholders’ equity was 3.3% and our weighted average net earnings return on shareholders’ equity was 2.7% annualized.
Since our IPO, we have committed capital of $7.4 billion in equity securities, $23.4 billion in debt securities and $2.7 billion in Structured Products. Since our IPO, we had repayments of $27.5 billion, representing 82% of our total capital committed. Since our IPO, our weighted average net earnings return on shareholders’ equity was 3.9% annualized.
During the last year, three years and since our IPO, our economic return (NAV per share growth plus dividend distributions) has totaled (3.0)%, 3.7% and 15.8%, respectively. Since our IPO, our stock price plus dividend distributions has totaled an annualized growth rate of 13.6%.

4


Portfolio Composition
 Our investments can be divided into the following six business lines: (i) American Capital One Stop Buyouts®, (ii) Sponsor Finance and Other Investments, (iii) European Capital, (iv) American Capital Asset Management, (v) Structured Products and (vi) Senior Floating Rate Loans.
As of December 31, 2015, we had investments totaling $4.9 billion and $5.0 billion at cost basis and fair value, respectively. As of December 31, 2015, our ten largest investments had a cost basis and fair value of $1.6 billion and $2.3 billion, respectively, or 46% of total investments at fair value, and are as follows (in millions):
Company 
 
Business Line
 
Industry
 
Cost Basis
 
Fair Value
American Capital Asset Management, LLC
 
American Capital Asset Management
 
Capital Markets
 
$
534

 
$
1,065

CML Pharmaceuticals, LLC
 
American Capital One Stop Buyouts®
 
Life Sciences Tools & Services
 
298

 
249

Bellotto Holdings Limited
 
European Capital
 
Household Durables
 
136

 
166

SEHAC Holding Corporation
 
American Capital One Stop Buyouts®
 
Diversified Consumer Services
 
15

 
160

Infogix Parent Corporation
 
Sponsor Finance and Other Investments
 
IT Services
 
154

 
154

Soil Safe Acquisition Corp.
 
Sponsor Finance and Other Investments
 
Professional Services
 
116

 
122

WRH, Inc.
 
American Capital One Stop Buyouts®
 
Life Sciences Tools & Services
 
103

 
99

MW Acquisition Corporation
 
American Capital One Stop Buyouts®
 
Health Care Providers & Services
 
77

 
96

Convergint Technologies, LLC
 
Sponsor Finance and Other Investments
 
Commercial Services & Supplies
 
94

 
94

European Capital Private Debt LP
 
European Capital
 
Diversified Financial Services
 
81

 
85

Total
 
 
 
 
 
$
1,608

 
$
2,290

 
 
 
 
 
 
 
 
 
The following tables show the composition of our investment portfolio by business line at cost basis and fair value, as a percentage of total investments, as of December 31, 2015 and 2014:
 
2015
 
2014
Cost
 
 
 
American Capital One Stop Buyouts®
27.1
%
 
26.9
%
Sponsor Finance and Other Investments
37.3
%
 
17.2
%
European Capital
11.2
%
 
13.1
%
American Capital Asset Management
10.9
%
 
6.7
%
Structured Products
12.2
%
 
9.7
%
Senior Floating Rate Loans
1.3
%
 
26.4
%
Total
100.0
%
 
100.0
%
 
 
 
 
Fair Value
 
 
 
American Capital One Stop Buyouts®
23.5
%
 
19.3
%
Sponsor Finance and Other Investments
37.1
%
 
17.3
%
European Capital
8.6
%
 
9.4
%
American Capital Asset Management
21.3
%
 
18.5
%
Structured Products
8.4
%
 
8.9
%
Senior Floating Rate Loans
1.1
%
 
26.6
%
Total
100.0
%
 
100.0
%

5


 The following tables show the composition summaries of our investment portfolio by security type at cost basis and fair value, excluding derivative agreements, as a percentage of total investments, as of December 31, 2015 and 2014:
 
2015
 
2014
Cost
 
 
 
First Lien Senior Debt
20.1
%
 
40.5
%
Second Lien Senior Debt
19.9
%
 
11.2
%
Mezzanine Debt
14.0
%
 
10.0
%
Preferred Equity
12.4
%
 
13.4
%
Common Equity
21.4
%
 
15.0
%
Structured Products
12.2
%
 
9.9
%
Total
100.0
%
 
100.0
%
 
 
 
 
Fair Value
 
 
 
First Lien Senior Debt
18.4
%
 
40.0
%
Second Lien Senior Debt
18.7
%
 
10.9
%
Mezzanine Debt
12.1
%
 
7.5
%
Preferred Equity
12.1
%
 
7.4
%
Common Equity
30.3
%
 
24.9
%
Structured Products
8.4
%
 
9.3
%
Total
100.0
%
 
100.0
%

 

6


Our investments are primarily in portfolio companies located in the United States. We have a diversified investment portfolio and do not concentrate in any one or two industry sectors, apart from Asset Management. We use the Global Industry Classification Standards (“GICS®”) for classifying the industry groupings of our portfolio companies. The GICS® was developed by MSCI, an independent provider of global indexes and benchmark-related products and services, and Standard & Poor’s (“S&P”), an independent international financial data and investment services company and provider of global equity indexes. The following chart shows the portfolio composition by industry grouping at fair value as a percentage of total investments as of December 31, 2015. Our investments in CLO securities and derivative agreements are excluded from the table below. Our investments in CMBS are classified in the Real Estate category below.
American Capital One Stop Buyouts® 
In an American Capital One Stop Buyout®, we lend senior and mezzanine debt and make majority equity investments to finance our acquisition of an operating company through a change in control. A change in control transaction could be the result of a corporate divestiture, a sale by a private equity firm, a sale by a family-owned closely held business, going private transactions or ownership transitions. In addition, we may make additional add-on investments in our American Capital One Stop Buyouts® to finance strategic acquisitions, growth or for working capital.
As of December 31, 2015, we had 23 companies in our American Capital One Stop Buyouts® portfolio with a cost basis and fair value of $1,332 million and $1,174 million, respectively, with an average investment size of $51 million at fair value. As of December 31, 2015, our American Capital One Stop Buyouts® portfolio consisted of $663 million and $511 million of debt and equity investments at fair value, respectively. As of December 31, 2015, the weighted average effective interest rate on the debt investments in this portfolio was 10.0%, which includes the impact of non-accruing loans, and our fully-diluted weighted average ownership interest in the equity investments in this portfolio was 88%. During the year ended December 31, 2015, we recognized interest, dividend and fee income from our American Capital One Stop Buyouts® portfolio of $141 million.
As a BDC, we are required by law to make significant managerial assistance available to most of our portfolio companies. Such assistance typically involves providing guidance and counsel concerning the management, operations and business objectives

7


and policies of the portfolio company to its management and board of directors, including participating on the company’s board of directors. We have an operations team with significant turnaround and bankruptcy experience that assists our investment professionals in providing intensive operational and managerial assistance to our portfolio companies. As of December 31, 2015, we had board seats at 21 companies in our American Capital One Stop Buyouts® portfolio and had board observation rights at certain other companies. Providing assistance to the companies in our investment portfolio serves as an opportunity for us to maximize their value.
Sponsor Finance and Other Investments
The majority of the investments in our Sponsor Finance and Other Investments portfolio were originated either to assist in the funding of change of control buyouts of privately-held middle and large market companies sponsored by other private equity firms or to support the growth or recapitalization of an existing portfolio company. In these transactions, we generally lend senior, mezzanine and unitranche debt and make minority equity co-investments. We will generally invest between $10 million and $150 million in a single Sponsor Finance transaction. Generally, we make investments in companies that have a minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $10 million.
Our senior loans may consist of first lien secured revolving credit facilities, first and second lien secured term loans and unitranche loans. Our mezzanine loans may consist of secured and unsecured loans. Our loans typically mature in five to ten years and require monthly or quarterly interest payments at fixed rates or variable rates generally based on London Interbank Offered Rate (“LIBOR”), plus a margin. Certain of our loans permit the interest to be paid-in-kind (“PIK”) by adding it to the outstanding loan balance and paid at maturity.
As of December 31, 2015, we had 71 companies in our Sponsor Finance and Other Investments portfolio with a cost basis and fair value of $1,830 million and $1,853 million, respectively, with an average investment size of $26 million at fair value. As of December 31, 2015, our Sponsor Finance and Other Investments portfolio consisted of $1,597 million and $256 million of debt and equity investments at fair value, respectively. As of December 31, 2015, the weighted average effective interest rate on the debt investments in this portfolio was 8.6%, which includes the impact of non-accruing loans, and our fully-diluted weighted average ownership interest in the equity investments in this portfolio was 43%. During the year ended December 31, 2015, we recognized interest, dividend and fee income from our Sponsor Finance and Other Investments portfolio of $132 million. As of December 31, 2015, the cost basis and fair value of our Sponsor Finance investments was $1,509 million and $1,522 million, respectively, and the cost basis and fair value of our Other investments was $321 million and $331 million, respectively.
American Capital Asset Management Investment
Our fund management business is conducted through our wholly-owned portfolio company, ACAM, and its consolidated subsidiaries. In general, subsidiaries of ACAM enter into management agreements with each of its managed funds. As of December 31, 2015, the cost basis and fair value of our investment in ACAM was $534 million and $1,065 million, respectively, or 21% of our total investments at fair value. ACAM, through a wholly-owned subsidiary, also holds direct investments in ACAS CLO 2012-1, ACAS CLO 2013-1, ACAS CLO 2014-1, ACAS CLO 2014-2, ACAS CLO 2015-1 and ACAS CLO 2015-2 consisting of 59% to 70% of the non-rated equity tranche of subordinated notes with an aggregate cost basis and fair value of $162 million and $108 million, respectively, as of December 31, 2015. As of December 31, 2015, ACAM holds a co-investment in ACE III with a cost basis and fair value of $72 million and $70 million, respectively, and a co-investment in ACSF with a cost basis and fair value of $4 million and $3 million, respectively.
As of December 31, 2015, ACAM’s earning assets under management totaled $14.5 billion. As of December 31, 2015, ACAM had $67 billion of total assets under management (including levered assets), including $57 billion of total assets under management for American Capital Agency Corp. (NASDAQ: AGNC), $6 billion of total assets under management for American Capital Mortgage Investment Corp. (NASDAQ: MTGE) and $236 million of total assets under management for American Capital Senior Floating, Ltd. (NASDAQ: ACSF).
As of December 31, 2015, ACAM had over 120 employees, including ten investment teams with over 70 investment professionals located in Bethesda (Maryland), New York, Annapolis (Maryland), London and Paris. We have entered into service agreements with ACAM to provide it with additional asset management and administrative services support. Through these agreements, we provide investment advisory and oversight services to ACAM, as well as access to our employees, infrastructure, business relationships, management expertise and capital raising capabilities. During the year ended December 31, 2015, American Capital earned $26 million from ACAM for these services. ACAM generally earns base management fees based on the shareholders’ equity or the net cost basis of the assets of the funds under management and may earn incentive income, or a carried interest, based on the performance of the funds. In addition, American Capital or ACAM may invest directly into these funds and earn investment income from its investments in those funds.

8


The following table sets forth certain information with respect to ACAM’s funds under management as of December 31, 2015:
Fund
 
Fund type
 
Established
 
Assets under management
 
Earning assets under management
 
Investment types
 
Capital type
AGNC
 
Publicly Traded REIT - NASDAQ (AGNC)
 
2008
 
$57.0 Billion
 
$8.8 Billion
 
Agency Securities
 
Permanent
MTGE
 
Publicly Traded REIT - NASDAQ (MTGE)
 
2011
 
$5.5 Billion
 
$1.1 Billion
 
Mortgage Investments
 
Permanent
ACSF
 
Publicly Traded BDC - NASDAQ (ACSF)
 
2014
 
$236 Million
 
$266 Million
 
Senior Floating
Rate Loans
 
Permanent
ACE I
 
Private Equity Fund
 
2006
 
$114 Million
 
$114 Million
 
Equity
 
Finite Life
ACE II
 
Private Equity Fund
 
2007
 
$99 Million
 
$126 Million
 
Equity
 
Finite Life
ACE III
 
Private Equity Fund
 
2014
 
$638 Million
 
$444 Million
 
Equity
 
Finite Life
ECAS UK SME Debt
 
Private Debt Fund
 
2014
 
$25 Million(1)
 
$24 Million(1)
 
Senior and Mezzanine Debt
 
Finite Life
ECAS debt fund
 
Private Debt Fund
 
2015
 
$294 Million
 
$230 Million
 
Senior and Mezzanine Debt
 
Finite Life
ACAS CLO Fund I
 
Private CLO Fund
 
2015
 
$252 Million
 
$448 Million
 
CLO Equity
 
Finite Life
ACAS CLO 2007-1
 
CLO
 
2006
 
$193 Million
 
$193 Million
 
Senior Debt
 
Finite Life
ACAS CLO 2012-1
 
CLO
 
2012
 
$322 Million
 
$322 Million
 
Senior Debt
 
Finite Life
ACAS CLO 2013-1
 
CLO
 
2013
 
$382 Million
 
$382 Million
 
Senior Debt
 
Finite Life
ACAS CLO 2013-2
 
CLO
 
2013
 
$381 Million
 
$381 Million
 
Senior Debt
 
Finite Life
ACAS CLO 2014-1
 
CLO
 
2014
 
$570 Million
 
$570 Million
 
Senior Debt
 
Finite Life
ACAS CLO 2014-2
 
CLO
 
2014
 
$382 Million
 
$382 Million
 
Senior Debt
 
Finite Life
ACAS CLO 2015-1
 
CLO
 
2015
 
$518 Million
 
$518 Million
 
Senior Debt
 
Finite Life
ACAS CLO 2015-2
 
CLO
 
2015
 
$487 Million
 
$487 Million
 
Senior Debt
 
Finite Life
 ——————————
(1)
Committed capital of £100 million ($148 million) in ECAS UK SME Debt fund, which remained largely unfunded as of December 31, 2015.

AGNC is a publicly traded real estate investment trust (“REIT”), which invests, on a leveraged basis, primarily in agency mortgage-backed securities, which consist of residential mortgage pass-through securities and collateralized mortgage obligations, for which the interest and principal payments are guaranteed by a U.S. government agency or U.S. government-sponsored entity. It may also invest in other assets reasonably related to agency securities and up to 10% of its assets in AAA non-agency and commercial mortgage-backed securities. Its common stock is traded on The NASDAQ Global Select Market under the symbol “AGNC.” ACAM earns a base management fee of 1.25% of AGNC’s shareholders’ equity, as defined in the management agreement. The management contract is renewable annually and if AGNC were not to renew the management agreement without cause, it would have to pay a termination fee equal to three times the average annual management fee earned by ACAM during the 24-month period immediately preceding the most recently completed month prior to the effective date of termination. If the termination fee were calculated for the period ending December 31, 2015, it would have been $351 million. As of December 31, 2015, AGNC’s total shareholders’ equity was $8.0 billion.
MTGE is also a publicly traded REIT, which invests, on a leveraged basis, in agency residential mortgage-backed investments, non-agency mortgage investments, other mortgage-related investments and healthcare-related real estate investments. Its common stock is traded on The NASDAQ Global Select Market under the symbol “MTGE.” ACAM earns a base management fee of 1.50% of MTGE’s shareholders’ equity, as defined in the management agreement. The management contract is renewable annually and if MTGE were not to renew the management agreement without cause, it would have to pay a termination fee equal to three times the average annual management fee earned by ACAM during the 24-month period immediately preceding the most recently completed month prior to the effective date of termination. If the termination fee were calculated for the period ending December 31, 2015, it would have been $52 million. As of December 31, 2015, MTGE’s total shareholders’ equity was $1.0 billion.
ACSF is a BDC that invests, on a leveraged basis, in diversified investments in first lien and second lien floating rate loans principally to large-market U.S.-based companies and in equity tranches of CLOs. Its common stock is traded on The NASDAQ Global Select Market under the symbol “ACSF.” ACAM earns a base management fee of 0.80% of ACSF’s total assets, as defined

9


in ACSF’s management agreement. Subject to ACSF stockholder approval, ACAM has agreed to be responsible through December 31, 2020 for certain of ACSF’s operating expenses in excess of 0.75% of ACSF’s consolidated net assets, less net unrealized appreciation or depreciation, each as determined in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) at the end of the most recently completed fiscal quarter.
ACE I is a private equity fund, which was established in 2006 with $1 billion of equity commitments from third-party investors. At the closing of the fund, ACE I used the majority of its committed capital to purchase 30% of our equity investments in 96 portfolio companies for an aggregate purchase price of $671 million. Also, ACE I co-invested with American Capital in an amount equal to 30% of equity investments made by us between October 2006 and November 2007 until the $329 million remaining equity commitment was exhausted. In addition, 10%, or $100 million, of the $1 billion of distributions to the ACE I investors is recallable for add-on investments. As of December 31, 2015, ACE I investors had invested $1,073 million, received distributions of $1,545 million, had $106 million in total investments at fair value and had $27 million of recallable distributions available for add-on investments. ACAM manages ACE I for a 2% base management fee on the net cost basis of ACE I’s assets (as of December 31, 2015 the net cost basis of ACE I’s assets was $114 million) and 10% to 30% of the net profits of ACE I, subject to certain hurdles (“Carried Interest”). As of December 31, 2015, the Carried Interest allocation to ACAM was $34 million, subject to certain clawback obligations, as defined in ACE I’s operating agreement. On June 30, 2015, ACE I entered into a stock purchase agreement with American Capital and its controlled affiliates, pursuant to which ACE I sold secondary and add-on investments in 22 portfolio companies to American Capital for an aggregate purchase price of $101 million, which was based on the fair value of the investments as of March 31, 2015. Pursuant to the operating agreement, ACE I was to be dissolved on October 1, 2014, unless extended by us for up to two additional years to allow for an orderly dissolution and liquidation of the fund’s investments in accordance with the operating agreement. During the third quarter of 2015, we extended the term of the fund to October 1, 2016.
ACE II is a private equity fund, which was established in 2007 with $585 million of equity commitments from third-party investors. At the closing of the fund, ACE II used the majority of its committed capital to purchase 17% of our equity investments in 80 portfolio companies for an aggregate purchase price of $488 million. The remaining $97 million equity commitment is being used to fund add-on investments in the 80 portfolio companies. As of December 31, 2015, ACE II investors had invested $516 million, received distributions of $583 million, had $97 million in total investments at fair value and had $69 million of remaining equity commitments available for future add-on investments or cost contributions. ACAM manages ACE II for a 2% base management fee on the net cost basis of ACE II’s assets (as of December 31, 2015, the net cost basis of ACE II’s assets was $126 million) and a 10% to 35% Carried Interest, subject to certain hurdles. As of December 31, 2015, ACAM has not recorded an accrual related to its Carried Interest in ACE II. On June 30, 2015, ACE II entered into a stock purchase agreement with American Capital and its controlled affiliates, pursuant to which ACE II sold secondary and add-on investments in 20 portfolio companies to American Capital for an aggregate purchase price of $44 million, which was based on the fair value of the investments as of March 31, 2015. Pursuant to the limited partnership agreement, ACE II will be dissolved on October 1, 2016, unless extended by us for up to two additional years to allow for an orderly dissolution and liquidation of the fund’s investments in accordance with the limited partnership agreement.
ACE III is a private equity fund, which was established in 2014 with $1.1 billion of equity commitments. As of December 31, 2015, ACE III investors had invested $714 million, received distributions of $652 million, had $637 million in total investments at fair value and had $290 million of remaining equity commitments available for future add-on investments or cost contributions. ACAM manages ACE III for a base management fee of 1.25% on the net cost basis of ACE III’s assets (as of December 31, 2015 the net cost basis of ACE III’s assets was $389 million) and 2% on outstanding capital commitments as well as 10% to 20% of the net profits of ACE III, subject to certain hurdles. As of December 31, 2015, the Carried Interest allocation to ACAM was $52 million, subject to certain clawback obligations, as defined in ACE III’s operating agreement. Pursuant to the operating agreement, ACE III will be dissolved on September 23, 2021, unless extended by us, subject to certain approvals, for up to two additional years to allow for an orderly dissolution and liquidation of the fund’s investments in accordance with the operating agreement.
ECAS UK SME Debt is a private equity fund, which was established in 2014 with £100 million ($148 million) of committed capital with the ability to add £50 million of leverage. The British Business Bank has committed £50 million to the fund under the British Business Bank Investment Programme. The remaining £50 million has been committed by European Capital and its affiliates. ECAS UK SME Debt provides debt financing to small and medium sized companies in the United Kingdom. ACAM manages ECAS UK SME Debt for an annual management fee of 1.50% on deployed capital and up to a 15% Carried Interest, subject to certain hurdles. ECAS UK SME Debt will be dissolved on August 17, 2024. As of December 31, 2015, European Capital’s investment in ECAS UK SME Debt had a cost basis and fair value of $13 million and $12 million, respectively. As of December 31, 2015, European Capital had an unfunded commitment of £42 million ($62 million) to ECAS UK SME Debt.     
The ECAS debt fund is a private debt fund that closed during the second quarter of 2015 with €318 million of capital commitments, of which €165 million was committed by European Capital and its affiliates. The ECAS debt fund provides debt financing to mid-market companies in Europe, primarily through unitranche, second lien and mezzanine financing, with secondary purchases of senior loans on an opportunistic basis. During the fourth quarter of 2015, the ECAS debt fund had an additional

10


closing of €69 million which increased the total capital commitments to €387 million. We anticipate a final closing by March 2016 to increase the investment capacity of the fund. The fund will have a three year investment period and a subsidiary of ACAM manages the ECAS debt fund for an annual management fee of 1.50% on deployed capital and up to a 15% carried interest, subject to certain hurdles. The ECAS debt fund will be dissolved on March 19, 2025, unless extended. In April 2015, European Capital sold €162 million ($175 million) of investments at their approximate fair value in 9 portfolio companies to the ECAS debt fund. European Capital received €158 million ($170 million) for the sale of these assets. As of December 31, 2015, European Capital’s investment in the ECAS debt fund had a cost basis and fair value of $81 million and $85 million, respectively. As of December 31, 2015, European Capital had an unfunded commitment of €91 million ($100 million) to the ECAS debt fund.
On August 5, 2015, we entered into a definitive agreement to sell certain CLO equity investments to ACAS CLO Fund I for $300 million. The purchase price was the aggregate fair value of the CLO equity investments as of June 30, 2015, subject to customary adjustments. The closing of the sale occurred on November 2, 2015. ACAS CLO Fund I is a $450 million private investment fund, which invests primarily in equity tranches of CLOs. As of December 31, 2015, ACAS CLO Fund I investors had invested $299 million, received distributions of $0.6 million, had $247 million in total investments at fair value and had $114 million of remaining equity commitments available for future add-on investments or cost contributions. ACAS CLO Fund I is managed by a subsidiary of ACAM for customary management and incentive fees.
In April 2007, ACAS CLO 2007-1 completed a $400 million securitization that invests primarily in senior floating rate loans. ACAM manages ACAS CLO 2007-1 for a base management fee of 0.68% of ACAS CLO 2007-1’s assets and a 20% Carried Interest, subject to certain hurdles. American Capital purchased 70% of the non-rated equity tranche of subordinated notes in ACAS CLO 2007-1 for $26 million and 55% of the originally rated BB/Ba2 notes for $9 million.
In September 2012, ACAS CLO 2012-1 completed a $362 million securitization that invests primarily in senior floating rate loans. ACAM manages ACAS CLO 2012-1 for a base management fee of 0.42% of ACAS CLO 2012-1’s total assets and a 20% Carried Interest, subject to certain hurdles. A subsidiary of ACAM also purchased 70% of the non-rated equity tranche of subordinated notes in ACAS CLO 2012-1 for $30 million.
In March 2013, ACAS CLO 2013-1 completed a $414 million securitization that invests primarily in senior floating rate loans purchased in the primary and secondary markets. ACAM manages ACAS CLO 2013-1 for a base management fee of 0.50% of ACAS CLO 2013-1’s assets and a 20% Carried Interest, subject to certain hurdles. A subsidiary of ACAM also purchased 70% of the non-rated equity tranche of subordinated notes in ACAS CLO 2013-1 for $25 million.
In September 2013, ACAS CLO 2013-2 completed a $414 million securitization that invests primarily in senior floating rate loans purchased in the primary and secondary markets. ACAM manages ACAS CLO 2013-2 for a base management fee of 0.50% of ACAS CLO 2013-2’s assets and a 20% Carried Interest, subject to certain hurdles. American Capital purchased 21% of the non-rated equity tranche of subordinated notes in ACAS CLO 2013-2 for $8 million, which we subsequently sold to ACAS CLO Fund I.
In July 2014, ACAS CLO 2014-1 completed a $619 million securitization that invests primarily in senior floating rate loans purchased in the primary and secondary markets. ACAM manages ACAS CLO 2014-1 for an annual base management fee of 0.50% of ACAS CLO 2014-1’s assets and a 20% Carried Interest, subject to certain hurdles. A subsidiary of ACAM also purchased 60% of the non-rated equity tranche of subordinated notes in ACAS CLO 2014-1 for $31 million.
In November 2014, ACAS CLO 2014-2 completed a $411 million securitization that invests primarily in senior floating rate loans purchased in the primary and secondary markets. ACAM manages ACAS CLO 2014-2 for an annual base management fee of 0.50% of ACAS CLO 2014-2’s assets and a 20% Carried Interest, subject to certain hurdles. A subsidiary of ACAM also purchased 61% of the non-rated equity tranche of subordinated notes in ACAS CLO 2014-2 for $25 million.
In May 2015, ACAS CLO 2015-1 completed a $552 million securitization that invests primarily in broadly syndicated senior secured floating rate loans purchased in the primary and secondary markets. ACAM manages ACAS CLO 2015-1 in exchange for an annual base management fee of 0.50% of ACAS CLO 2015-1’s assets and a 20% carried interest, subject to certain hurdles. A subsidiary of ACAM also purchased 65% of the non-rated subordinated notes in ACAS CLO 2015-1 for $30 million.
In August 2015, ACAS CLO 2015-2 completed a $510 million securitization that invests primarily in broadly syndicated senior secured floating rate loans purchased in the primary and secondary markets. ACAM manages ACAS CLO 2015-2 in exchange for an annual base management fee of 0.50% of ACAS CLO 2015-2’s assets and a 20% carried interest, subject to certain hurdles. A subsidiary of ACAM also purchased 59% of the non-rated subordinated notes in ACAS CLO 2015-2 for $30 million.
Structured Products Investments
Our Structured Products investments consist of investments in CLO, CDO and CMBS securities. Our Structured Products investments are generally in non-investment grade securities. We invest in Structured Products with the intention of holding them until maturity.

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As of December 31, 2015, our investment in CLO and CDO securities had a cost basis and fair value of $548 million and $387 million, respectively, or 8% of our total investments at fair value. This includes our investment in ACAS CLO 2007-1, which represents $21 million at fair value. As of December 31, 2015, our total investment in CMBS bonds had a cost basis and fair value of $49 million and $31 million, respectively, or less than 1% of our total investments at fair value. Our investments in CMBS bonds are secured by diverse pools of commercial mortgage loans.
Senior Floating Rate Loans
Our Senior Floating Rate Loan portfolio is composed primarily of diversified investments in first lien floating rate loans to large-market U.S. based companies (defined as issuers with EBITDA greater than $50 million). Our Senior Floating Rate Loan portfolio may also include second lien floating rate loans. Senior Floating Rate Loans are typically collateralized by a company’s assets and structured with first lien or second lien priority on collateral, providing for greater security and potential recovery in the event of default compared to other subordinated fixed-income products. Senior Floating Rate Loans generally have a stated term of three to seven years and typically pay interest based on a floating rate calculated as a spread over a market index, primarily LIBOR, and generally have a minimum market index floor. Our Senior Floating Rate Loans are also typically traded among investors in an active secondary market with no investor owning a significant percentage of the issue. We generally own less than 2% of any single loan issue.
We initiated our Senior Floating Rate Loan portfolio in 2014 and purchased $3.0 billion of investments through December 31, 2015. During the fourth quarter of 2015, we substantially liquidated our Senior Floating Rate Loan portfolio. Since 2014, we have received $2.5 billion in proceeds from the sale of these investments and have $364 million in unsettled trade receivables as of December 31, 2015. The proceeds from the sale of our Senior Floating Rate Loan portfolio were partially utilized to pay down obligations under the $1.25 billion secured revolving credit facility and $500 million secured revolving credit facility.
As of December 31, 2015, there were debt investments in 13 companies in our Senior Floating Rate Loan portfolio with a cost basis and fair value of $62 million and $57 million, respectively. As of December 31, 2015, approximately 99% of our Senior Floating Rate Loan portfolio, at fair value, was composed of loans with a facility rating by the S&P of at least “B-” or higher. None of the investments in our Senior Floating Rate Loan portfolio were in default or on non-accrual as of December 31, 2015.
During the year ended December 31, 2015, we recognized interest income and interest expense from our Senior Floating Rate Loan Portfolio totaling $84 million and $27 million, respectively. During the year ended December 31, 2014, we recognized interest income and interest expense from our Senior Floating Rate Loan portfolio totaling $33 million and $4 million, respectively. During the year ended December 31, 2015, we realized a loss of $63 million from our Senior Floating Rate Loan portfolio, which was partially offset by a reversal of unrealized depreciation of $30 million.
European Capital
 European Capital primarily invests in senior and mezzanine debt and equity in buyouts of private companies sponsored by European Capital (“European Capital One Stop Buyouts®”), or sponsored by other private equity funds and provides capital directly to early stage and mature private and small public companies (“European Capital Sponsor and Other Finance Investments”).
 As of December 31, 2015, European Capital had investments in 14 portfolio companies totaling $431 million at fair value, with an average investment size of $31 million at fair value. As of December 31, 2015, European Capital’s five largest investments at fair value were $387 million, or 90% of its total investments at fair value. 

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The following table shows the composition of European Capital’s investment portfolio by security type at cost basis and fair value, as a percentage of total investments, as of December 31, 2015 and 2014:
 
2015
 
2014
Cost
 
 
 
First Lien Senior Debt
4.0
%
 
33.1
%
Second Lien Senior Debt
4.5
%
 
3.3
%
Mezzanine Debt
25.5
%
 
24.1
%
Preferred Equity
26.9
%
 
24.0
%
Common Equity
39.1
%
 
14.0
%
Structured Products
%
 
1.5
%
Total
100.0
%
 
100.0
%
 
 
 
 
Fair Value
 
 
 
First Lien Senior Debt
4.4
%
 
46.0
%
Second Lien Senior Debt
%
 
%
Mezzanine Debt
20.4
%
 
15.7
%
Preferred Equity
23.9
%
 
13.3
%
Common Equity
51.3
%
 
21.3
%
Structured Products
%
 
3.7
%
Total
100.0
%
 
100.0
%

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European Capital uses the GICS® for classifying the industry groupings of its portfolio companies. The following chart shows European Capital’s portfolio composition by industry grouping at fair value as a percentage of its total investments as of December 31, 2015.
Lending and Investment Decision Criteria
We generally review certain criteria in order to make investment decisions. The list below represents a general overview of the criteria we use in making our lending and investment decisions in our investment portfolio. Not all criteria are required to be favorable in order for us to make an investment. Add-on investments for growth, acquisitions or recapitalizations are based on the same general criteria. Add-on investments in distressed situations are based on the same general criteria, but are also evaluated on the potential to preserve prior investments.
Operating History. We generally focus on middle market companies that have been in business over ten years and have an attractive operating history, including generating positive cash flow. We generally target companies with significant market share in their products or services relative to their competitors. In addition, we consider factors such as customer concentration, performance during recessionary periods, competitive environment and ability to sustain margins.
 Growth. We consider a target company’s ability to increase its cash flow. Anticipated growth is a key factor in determining the ability of the company to repay its debt and the value ascribed to any warrants and equity interests acquired by us.
 Liquidation Value of Assets. Although we do not operate as an asset-based lender, liquidation value of the assets collateralizing our loans is a factor in many credit decisions. Emphasis is placed both on tangible assets such as accounts receivable, inventory, plant, property and equipment as well as intangible assets such as brand recognition, market reputation, customer lists, networks, databases and recurring revenue streams.
 Experienced Management Team. We consider the quality of senior management to be extremely important to the long-term performance of most companies. Therefore, we consider it important that senior management be experienced and properly incentivized through meaningful ownership interest in the company.

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 Exit Strategy. Almost all of our investments consist of securities acquired directly from their issuers in private transactions. These securities are rarely traded in public markets, thus limiting their liquidity. Therefore, we consider it important that a prospective portfolio company have a number of methods by which our financing can be repaid and our equity investment sold or redeemed. These methods would typically include the sale or refinancing of the business, the ability to generate sufficient cash flow to repurchase our equity securities and repay our loans or the ability to contribute the security to a fund that we manage.
 Structured Products Criteria. We receive extensive information from the issuer regarding their track record and the collateral pool. We underwrite the manager and the collateral securing our investment as appropriate.
Fund Investment Criteria. We receive extensive information from the manager regarding their track record and the investment thesis. We assess the ability to raise capital with the manager and underwrite the manager and the investment strategy as appropriate.
Institutional Approach to Investing
 We have built an institution with a leading capability to originate, underwrite, finance, syndicate, monitor and exit investments that generate attractive returns. Our dedicated teams of investment professionals are the cornerstone of our institution. We have also created an extensive support structure that provides in-house due diligence, operational, legal and human resources support to our investment professionals and to our portfolio company, ACAM.
Investment Process
Investment Sourcing and Screening: We have a multi-disciplined approach to reach diverse channels of deal sources. Our Investment Teams target a referral network composed of investment bankers, private equity firms, mezzanine debt funds, trade organizations, commercial bankers, attorneys and business and financial brokers. We developed and maintain a proprietary industry-wide database of reported middle market transactions, which enables us to monitor and evaluate the middle market investing environment. This database is used to help us assess whether we are penetrating our target markets and to track terms and pricing. Our financial professionals review financing memorandums and private placement memorandums sourced from this referral network in search of potential buyout or financing opportunities. Our Investment Teams undertake a preliminary evaluation and analysis of potential investment opportunities to determine whether or not they meet our criteria based upon the limited information received in these early stages of the investment process. For investment opportunities that pass an initial screening process, our Investment Teams prepare an initial investment thesis and analysis that is presented to an internal Investment Committee, which includes representatives of our senior officers depending on the nature of the proposed investment, for approval to proceed further.
 Due Diligence: In our investment portfolio, our investment professionals along with FACT and our Operations Team conduct due diligence of each target company that passes the initial screening process. This includes one or more on-site visits, a review of the target company’s historical and prospective financial information, identifying and confirming pro-forma financial adjustments, interviews with and assessments of management, employees, customers and vendors, review of the adequacy of the target company’s systems, background investigations of senior management and research on the target company’s products, services and industry. We often engage professionals such as environmental consulting firms, accounting firms, law firms, risk management companies and management consulting firms with relevant industry expertise to perform elements of the due diligence.
Investment Approval: Upon completion of our due diligence, our Investment Teams, FACT and our Operations Team, as well as any consulting firms that we have engaged, prepare and present a report containing the due diligence information for review by our Investment Committee. Our Board of Directors has delegated authority to the Investment Committee to conduct the initial review and approval of our investments. Our Investment Committee generally must approve each investment. Investments exceeding a certain size or meeting certain other criteria must also be approved by our Board of Directors. Our Investment Committee is supported by a dedicated staff that focuses on the due diligence and other research done with regard to each proposed investment.  
Documentation and Negotiations: Documentation for the legal agreements for a transaction is completed either by our in-house legal team or through the retention of outside legal counsel. We maintain custody of our investment securities and the original related investment documentation in custodial accounts with qualified banks and members of national securities exchanges in accordance with applicable regulatory and financing requirements.
 Investment Funding: Prior to the release of any funding for investments, our treasury department prepares a summary of the investment terms, the funding amounts approved by our Investment Committee and wiring instructions. Our treasury department performs various procedures to confirm any wiring instructions. A senior executive officer must approve this summary of terms and funding amounts prior to the disbursement of the funds.
 Portfolio Monitoring: In addition to the due diligence at the time of the original investment decision, we seek to preserve and enhance the performance of our portfolio companies under management through our active involvement with the portfolio companies. As a BDC, we are required by law to make significant managerial assistance available to most of our eligible portfolio companies. This generally includes providing guidance and counsel concerning the management, operations and business objectives

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and policies of the portfolio company to the portfolio company’s management and board of directors, including participating on the company’s board of directors. The respective Investment Teams, FACT, Operations Teams and accounting teams regularly review each portfolio company’s monthly financial statements to assess performance and trends, periodically conduct on-site financial and operational reviews and evaluate industry and economic issues that may affect the portfolio company.
 Investment Exits: We regularly evaluate each investment to determine the appropriate time to exit an investment. For investments that we control, portfolio companies are usually sold through an auction process, following the engagement of an investment bank. For performing investments that we do not control, the exit typically occurs when the sponsor or other party in control of the portfolio company decides to recapitalize or sell the business. In both instances, our debt investment is typically paid in full and any equity investment we own realizes a value consistent with the value realized by the controlling parties. For non-performing investments that we do not control, we may determine that based on the facts and circumstances relating to the investment, to accept an amount less than what we are legally owed with any such decision requiring approval by our Investment Committee.
Portfolio Valuation
 FACT, with the assistance of our Investment Teams and subject to the oversight of the Audit, Compliance and Valuation Committee, prepares a quarterly valuation of each of our portfolio company investments. Our Board of Directors approves our portfolio valuations as required by the 1940 Act.
Competition
 We compete with strategic buyers, private equity funds, mezzanine debt funds and other buyers and financing sources, including traditional financial services companies such as finance companies, commercial banks, investment banks and other equity and non-equity based investment funds. Some of our competitors are substantially larger and have considerably greater financial resources than we do. Competitors may have a lower cost of funds and many have access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships and build their market shares.
Corporate Information
Our executive offices are located at 2 Bethesda Metro Center, 14th Floor, Bethesda, Maryland 20814, and our telephone number is (301) 951-6122. In addition to our executive offices, we, or subsidiaries of our wholly-owned portfolio company ACAM, maintain offices in New York, Chicago, Boston, Annapolis (Maryland), London, Paris and Singapore.
 We make available all of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports free of charge on our internet website at www.AmericanCapital.com as soon as reasonably practical after such material is electronically filed with or furnished to the SEC. These reports are also available on the SEC’s internet website at www.sec.gov. The public may also read and copy paper filings that we have made with the SEC at the SEC’s Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330.
Employees
As of December 31, 2015, we employed 346 full-time employees, which included 124 employees at ACAM, compared to 366 and 394 full-time employees as of December 31, 2014 and 2013, respectively. We believe that we have excellent relations with our employees.
Business Development Company Requirements
We are a closed-end, non-diversified, management investment company that has elected to be regulated as a BDC under the 1940 Act, and, as such, are subject to regulation under that act.
Qualifying Assets
 As a BDC, we may not acquire any asset other than certain qualifying assets described in the 1940 Act, unless, at the time the acquisition is made, the value of such qualifying assets represent at least 70% of the value of our total assets. The principal categories of qualifying assets relevant to our business include the following:
 securities purchased in transactions not involving any public offering from:
(a)
an issuer that (i) is organized and has its principal place of business in the United States, (ii) is neither an investment company other than a wholly-owned small business investment company nor an entity that would be an investment company but for certain statutory exemptions, and (iii) does not have any class of

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securities listed on a national securities exchange with a market capitalization in excess of $250 million; or
(b)
an issuer that satisfies the criteria set forth in clauses (a) (i) and (ii) above but not clause (a)(iii), so long as, at the time of purchase, we own at least 50% of (i) the greatest amount of equity securities of the issuer, including securities convertible into such securities and (ii) the greatest amount of certain debt securities of such issuer, held by us at any point in time during the period when such issuer was an eligible portfolio company, except that options, warrants, and similar securities which have by their terms expired and debt securities which have been converted, or repaid or prepaid in the ordinary course of business or incident to a public offering of securities of such issuer, shall not be considered to have been held by us, and we are one of the 20 largest holders of record of such issuer's outstanding voting securities;
securities of an issuer described in clauses (a)(i) and (ii) above with respect to which we control (alone or together as a part of a group), we in fact exercise a controlling influence over such issuer’s management or policies and a person affiliated with us is on the issuer’s board of directors;
securities received in exchange for or distributed with respect to securities described above, or pursuant to the exercise of options, warrants or rights relating to such securities; and
cash, cash items, U.S. government securities, or high quality debt securities maturing in one year or less from the time of investment.
To include certain securities above as qualifying assets for the purpose of the 70% test, a BDC must either control the issuer of the securities or offer to make significant managerial assistance available to the issuer of those securities, such as providing significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company or making loans to a portfolio company. We make significant managerial assistance available to most of our eligible portfolio companies.
Under the 1940 Act, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC without consent of the holders of a majority of our outstanding voting securities. Since we made our BDC election, we have not made any substantial change in our structure or in the nature of our business.
Temporary Investments
 Pending investment in other types of qualifying assets described in the 1940 Act, we may invest our funds in cash items, government securities, agency paper or high quality debt securities maturing in one year or less from the time of investment in such high quality debt investments. We refer to such assets and cash herein as temporary investments.
Leverage
 The 1940 Act permits us, as a BDC, to issue senior debt securities and preferred stock (collectively, “Senior Securities”) in amounts such that our asset coverage is at least 200% after each issuance of Senior Securities. Asset coverage is defined in the 1940 Act as the ratio which the value of the total assets, less all liabilities and indebtedness not represented by Senior Securities, bears to the aggregate amount of Senior Securities representing indebtedness. Such indebtedness may also be incurred for the purpose of effecting share repurchases. As a result, we are exposed to the risks of leverage. Although we have no current intention to do so, we have retained the right to issue preferred stock, subject to certain limitations under the 1940 Act. As permitted by the 1940 Act, we may, in addition, borrow amounts up to 5% of our total assets for temporary purposes. As of December 31, 2015, our asset coverage was 482%.
Under the 1940 Act, if a BDC has any senior debt securities outstanding that were publicly issued, the BDC must make provision to prohibit the declaration of any dividend (except a dividend payable in the stock of the BDC) if its asset coverage is below 200% at the time of the distribution after deducting the amount of such dividend.
Issuance of Stock
As a BDC, we are generally not able to issue and sell our common stock at a price below our NAV per share, exclusive of any distributing commission or discount, except (i) with the prior approval of a majority of our shareholders, (ii) in connection with a rights offering to our existing shareholders, or (iii) under such other circumstances as the SEC may permit. As of December 31, 2015, our NAV was $19.88 per share and our closing market price was $13.79 per share. As of the date of this filing, we do not have any authorization to issue shares of our common stock below our NAV per share.

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Investment Objectives
Our primary business objectives are to increase our net earnings and NAV by investing in senior and mezzanine debt and equity securities of private companies and funds managed by ACAM with attractive current yields and/or potential for equity appreciation and realized gains and by growing our fee earning assets under management. Our investment objectives provide that:
We will at all times conduct our business so as to retain our status as a BDC. In order to retain that status, we may not acquire any assets (other than non-investment assets necessary and appropriate to our operations as a BDC) if after giving effect to the acquisition the value of our qualifying assets under the 1940 Act amounts to less than 70% of the value of our total assets. See “Business Development Company Requirements” for a discussion of certain qualifying assets described in the 1940 Act. We believe that most of the securities we will acquire (provided that we control, or through our officers or other participants in the financing transaction, make significant managerial assistance available to the issuers of these securities), as well as temporary investments, will generally be qualifying assets. Securities of public companies with a market capitalization in excess of $250 million, on the other hand, are generally not qualifying assets unless they were acquired in a distribution, in exchange for or upon the exercise of a right relating to securities that were qualifying assets.
We may invest up to 100% of our assets in securities acquired directly from issuers in privately-negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act of 1933.
We may issue Senior Securities to the extent permitted by the 1940 Act for the purpose of making investments, to fund share repurchases, or for temporary or emergency purposes. As a BDC, we may issue Senior Securities up to an amount so that the asset coverage, as defined in the 1940 Act, is at least 200% immediately after each issuance of Senior Securities.
We generally will not (a) act as an underwriter of securities of other issuers (except to the extent that we may (i) be deemed an “underwriter” of securities purchased by us that must be registered under the Securities Act of 1933 before they may be offered or sold to the public or (ii) underwrite securities to be distributed to or purchased by our shareholders in connection with offerings of securities by companies in which we are a shareholder); (b) sell securities short (except with regard to managing risks associated with publicly traded securities issued by portfolio companies); (c) purchase securities on margin (except to the extent that we may purchase securities with borrowed money); (d) write or buy put or call options (except (i) to the extent of warrants or conversion privileges in connection with our acquisition financing or other investments, and rights to require the issuers of such investments or their affiliates to repurchase them under certain circumstances, or (ii) with regard to managing risks associated with publicly traded securities issued by portfolio companies); (e) engage in the purchase or sale of commodities or commodity contracts, including futures contracts (except where necessary in working out distressed loan or investment situations); or (f) acquire more than 3% of the voting stock of, or invest more than 5% of our total assets in any securities issued by, any other investment company (as defined in the 1940 Act), except as they may be acquired as part of a merger, consolidation or acquisition of assets or as otherwise permitted by the staff of the SEC. With regard to that portion of our investments in securities issued by other investment companies it should be noted that such investments may subject our shareholders to additional expenses.
The percentage restrictions set forth above, other than the restriction pertaining to the issuance of Senior Securities, as well as those contained elsewhere herein, apply at the time a transaction is effected, and a subsequent change in a percentage resulting from market fluctuations or any cause other than an action by us will not require us to dispose of portfolio securities or to take other action to satisfy the percentage restriction.
The above investment objectives have been set by our Board of Directors and do not require shareholder consent to be changed.
Investment Adviser
We have no investment adviser and are internally managed by our executive officers under the supervision of our Board of Directors.

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Item 1A.
Risk Factors
You should carefully consider the risks described below, as well as other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes thereto before making an investment decision. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect us in the future. Any of the following risks could materially adversely affect our business, financial condition, results of operations or cash flows. In such case, you may lose all or part of your original investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Forward-Looking Statements” in this Annual Report on Form 10-K. 
Risks Related to Our Business and Structure
Our previously announced strategic review process may not result in a sale transaction or other strategic alternative, and if there is a sale transaction or other strategic alternative, there can be no assurance that stockholder value will be enhanced
On January 7, 2016, we announced that our Board of Directors had completed the initial phase of its previously announced strategic review process and had authorized us to proceed with a solicitation of offers to purchase our company or our various business lines in whole or in part. Even though the initial phase of the previously announced strategic review process has been completed, our strategic review process remains ongoing. No assurance can be given that the solicitation or strategic review process will result in any sale transaction or other strategic alternative. Any potential sale transaction or other strategic alternative would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in us or any of our business lines, stockholder approval and the availability of financing to potential buyers or us on reasonable terms. We also cannot assure you that a sale transaction or other strategic alternative, if consummated, will provide the anticipated benefits or otherwise enhance stockholder value. In addition, it is possible that we will undertake a sale transaction or other strategic alternative that is materially different than what we have announced or that has a material adverse effect on our financial condition, results of operations or cash flows.
Our strategic review process may have an adverse impact on our business. If we are unable to effectively manage the review process and successfully implement a strategic alternative, our business, financial condition, results of operations or cash flows could be adversely affected
We have incurred and expect to incur additional significant costs associated with identifying and evaluating various strategic alternatives. In addition, the process of pursuing any strategic alternative, including a sale transaction, is time consuming and disruptive to our business operations and may contribute to increased volatility in our stock price. Our review process may also create uncertainty which could impair our ability to motivate and retain qualified employees until any strategic alternative is consummated, as key employees may have concerns about their future employment with us following completion of a strategic alternative. If our key employees depart because of issues relating to the uncertainty and difficulty of completing a strategic alternative, consummation of any such strategic alternative could be negatively impacted or be subject to a differing outcome than if such employees had not departed. In addition, if we do not complete an announced strategic alternative, including a sale transaction, our business, financial condition, results of operation or cash flows could be adversely affected due to the departure of such key employees. See “We are dependent upon our key management personnel for our future success” below.
Future adverse market and economic conditions could cause harm to our operating results
Past recessions have had a significant negative impact on the operating performance and fair value of our portfolio investments. We have experienced losses during those recessions. Many of our portfolio companies could be adversely impacted again by any future economic downturn or recession and may be unable to repay our debt investments, may be unable to be sold at a price that would allow us to recover our investment, or may be unable to operate during such recession. Such portfolio company performance could have a material adverse effect on our business, financial condition and results of operations.
We have loans to and investments in middle market borrowers who may default on their loans and we may lose our investment 
We have invested in and made loans to privately-held, middle market businesses and plan to continue to do so. There is generally a limited amount of publicly available information about these businesses. Therefore, we rely on our principals, associates, analysts, other employees and consultants to investigate and monitor these businesses. The portfolio companies in which we have invested may have significant variations in operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle. Our portfolio companies may not meet net income, cash flow and other coverage tests typically imposed by senior lenders. Numerous factors may affect a portfolio company’s ability to repay its loans, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. Deterioration in a portfolio company’s financial condition and prospects may be accompanied by deterioration in the collateral

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for the loan. We have also made unsecured and mezzanine loans and invested in equity securities, which involve a higher degree of risk than senior secured loans. In certain cases, our involvement in the management of our portfolio companies may subject us to additional defenses and claims from borrowers and third-parties. These conditions may make it difficult for us to obtain repayment of our investments.
Middle market businesses typically have narrower business lines and smaller market shares than large businesses. They tend to be more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. In addition, these companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel.
These businesses may also experience substantial variations in operating results. Typically, the success of a middle market business also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on us. In addition, middle market businesses often need substantial additional capital to expand or compete and may have borrowed money from other lenders with claims that are senior to our claims.
Our senior loans generally are secured by the assets of our borrowers; however, certain of our senior loans may have a second priority lien and thus, our security interest may be subordinated to the payment rights and security interest of the first lien senior lender. Additionally, our mezzanine loans may or may not be secured by the assets of the borrower; however, if a mezzanine loan is secured, our rights to payment and our security interest are usually subordinated to the payment rights and security interests of the first and second lien senior lenders. Therefore, we may be limited in our ability to enforce our rights to collect our second lien senior loans or mezzanine loans and to recover any of the loan balance through a foreclosure of collateral.
Non-accruing loans adversely affect our results of operations and financial condition and could result in further losses in the future
As of December 31, 2015 and 2014, our non-accruing loans at cost totaled $280 million and $371 million, or 10.6% and 9.4% of our total loans at cost, respectively. Non-accruing loans adversely affect net income in various ways. Upon becoming non-accruing, we reverse prior PIK income from a non-accruing loan, if applicable, and no interest income is recorded on non-accruing loans, thereby, in both cases, adversely affecting income and returns on assets and equity. There is no assurance that we will not experience further increases in non-accruing loans in the future, or that non-accruing loans will not result in further losses to come.
There is uncertainty regarding the value of our portfolio investments
Virtually none of our portfolio investments are publicly traded. As required by law, we fair value these investments in accordance with the 1940 Act and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) based on a determination made in good faith by our Board of Directors. Due to the uncertainty inherent in valuing investments that are not publicly traded, as set forth in our audited consolidated financial statements included in this Annual Report on Form 10-K, our determinations of fair value may differ materially from the values that would exist if a ready market for these investments existed. Our determinations of the fair value of our investments have a material impact on our net earnings through the recording of unrealized appreciation or depreciation of investments as well as our assessment of income recognition. Thus, our NAV could be materially affected in the event of any changes in applicable law or accounting pronouncements governing how we currently fair value assets, or if our determinations regarding the fair value of our investments are materially different from the values that would exist if a ready market existed for these securities.
Our business has significant capital requirements and may be adversely affected by a prolonged inability to access the capital markets or to sell assets
Our business requires a substantial amount of capital to operate. We historically have financed our operations, including the funding of new investments, through cash generated by our operating activities, the repayment of debt investments, the sale of equity investments, the issuance of debt by special purpose affiliates to which we have contributed loan assets, the sale of our stock and through secured and unsecured borrowings. Our ability to continue to rely on such sources or other sources of capital is affected by restrictions in both the 1940 Act and in certain of our debt agreements relating to the incurrence of additional indebtedness as well as changes in the capital markets from the recent economic recession. It is also affected by legal, structural and other factors. There can be no assurance that we will be able to earn or access the funds necessary for our liquidity requirements.
Our ability to recognize the benefits of our deferred tax asset is dependent on future taxable income and could be substantially limited if we experience an “ownership change” within the meaning of Section 382 of the Code
We recognize the expected future tax benefit from a deferred tax asset when the tax benefit is considered more likely than not to be realized. Otherwise, a valuation allowance is applied against the deferred tax asset. Assessing the recoverability of a

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deferred tax asset requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from investments and operations, the character of expected income or loss as either capital or ordinary and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and the amount or character of taxable income differ significantly from estimates, our ability to realize the deferred tax asset could be impacted. See Note 11 to our audited consolidated financial statements included in this Annual Report on Form 10-K.
Additionally, under Sections 382 and 383 of the Code, following an “ownership change,” certain limitations apply to the use by a “loss corporation” of certain tax attributes including net operating loss carryforwards, capital loss carryforwards, unrealized built-in losses and tax credits arising before the “ownership change.” Such tax attributes represent substantially all of our deferred tax assets. In general, an “ownership change” would occur if there is a cumulative change in the ownership of our common stock of more than 50 percentage points by one or more “5% shareholders” during a three-year period. In the event of an “ownership change,” the tax attributes that may be used to offset our future taxable income in each year after the “ownership change” will be subject to an annual limitation. In general, the annual limitation is equal to the product of the fair market value of our common stock on the date of the “ownership change” and the “long term tax exempt rate” (which is published monthly by the Internal Revenue Service), subject to specified adjustments. This limitation could accelerate our cash tax payments and could result in a significant portion of our deferred tax asset expiring before we could fully use them. We do not believe that we have previously undergone an “ownership change” or that our tax attributes are currently subject to any such limitations.
Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business
We and our portfolio companies are subject to regulation by laws at the local, state, federal and foreign level, including with respect to securities laws, tax and accounting standards. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations or the failure to comply with these laws or regulations could have a material adverse impact on our business. Certain of these laws and regulations pertain specifically to BDCs.
A change in interest rates may adversely affect our profitability
Because we have funded a portion of our investments with borrowings, our earnings are affected by the spread between the interest rate on our investments and the interest rate at which we borrowed funds. We have attempted to match-fund our liabilities and assets by financing floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities or equity. We have entered and may enter into interest rate basis swap agreements to match the interest rate basis of a portion of our assets and liabilities, thereby locking in the spread between our asset yield and the cost of our borrowings, and to fulfill our obligations under the terms of any asset securitizations. However, such derivatives are considered economic hedges that do not qualify for hedge accounting under ASC Topic 815, Derivatives and Hedging (“ASC 815”). Therefore, payments under the hedges are recorded in net realized (loss) gain in our audited consolidated financial statements included in this Annual Report on Form 10-K.
Under any such interest rate swap agreements, we will generally pay a fixed rate and receive a floating interest rate based on LIBOR. We may enter into interest rate swaption agreements where, if exercised, we would receive a fixed rate and pay a floating rate based on LIBOR. We may also enter into interest rate cap agreements that would entitle us to receive an amount, if any, by which our interest payments on our variable rate debt exceed specified interest rates.
An increase or decrease in interest rates could reduce the spread between the rate at which we invest and the rate at which we borrow, and thus, adversely affect our profitability, if we have not appropriately match-funded our liabilities and assets or hedged against such event. Alternatively, our interest rate hedging activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio.
Also, the fair value of certain of our debt investments is based in part on the current market yields or interest rates of similar securities. A change in interest rates could have a significant impact on our determination of the fair value of these debt investments. In addition, a change in interest rates could also have an impact on the fair value of our interest rate swap agreements that could result in the recording of unrealized appreciation or depreciation in future periods. For example, a decline, or a flattening, of the forward interest rate yield curve will typically result in the recording of unrealized depreciation of our interest rate swap agreements.
Therefore, adverse developments resulting from changes in interest rates could have a material adverse effect on our business, financial condition and results of operations. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk and Item 8. Financial Statements and Supplementary Data for additional information on interest rate swap agreements.



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A change in currency exchange rates may adversely affect our profitability
We have or may make investments in debt instruments that are denominated in currencies other than the U.S. dollar. In addition, we have or may make investments in the equity of portfolio companies whose functional currency is not the U.S. dollar. Our domestic portfolio companies may also transact a significant amount of business in foreign countries and therefore their profitability may be impacted by changes in foreign currency exchange rates. The functional currency of our consolidated portfolio company, European Capital, is the Euro. European Capital also has investments in other European currencies, including the British Pound. As a result, an adverse change in currency exchange rates may have a material adverse impact on our business, financial condition and results of operations.
We may experience fluctuations in our quarterly results
We have experienced and could experience material fluctuations in our quarterly operating results due to a number of factors including, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, placing and removing investments on non-accrual status, the degree to which we encounter competition in our markets, the ability to sell investments at attractive terms, the ability to fund and close suitable investments, the timing of the recognition of fee income from closing investment transactions and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  
We are dependent upon our key management personnel for our future success
We are dependent on the diligence and skill of our senior management and other members of management for raising capital and the selection, structuring, monitoring, restructuring/amendment, sale and exiting of our investments. Our future success depends to a significant extent on the continued service of our senior management and other members of management. Our failure to raise additional capital that would enhance the growth of our business, or our failure to provide appropriate opportunities for or compensate competitively senior management and other members of management may make it difficult to retain such individuals. The departure of certain executive officers or key employees could materially adversely affect our ability to implement our business strategy. We do not maintain key man life insurance on any of our officers or employees. See Our strategic review process may have an adverse impact on our business. If we are unable to effectively manage the review process and successfully implement a strategic alternative, our business, financial condition, results of operations or cash flows could be adversely affected” above.
We operate in a highly competitive market for investment opportunities  
We compete with strategic buyers and hundreds of private equity and mezzanine debt funds and other financing sources, including traditional financial services companies such as finance companies, commercial banks, investment banks and other equity and non-equity based investment funds. Some of our competitors are substantially larger and have considerably greater financial resources than us. Competitors may have lower cost of funds and many have access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to offer better pricing and terms to prospective portfolio companies, consider a wider variety of investments and establish more relationships and build their market shares. There is no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. In addition, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time and there can be no assurance that we will be able to identify and make investments that satisfy our investment objectives or that we will be able to meet our investment goals.
We could face losses and potential liability if intrusions, viruses or similar disruptions to our technology jeopardize our confidential information or that of users of our technology  
Although we have implemented and will continue to implement security measures, our technology platform is and will continue to be vulnerable to intrusion, computer viruses or similar disruptive problems caused by transmission from unauthorized users. In addition, any misappropriation of proprietary information could expose us to a risk of loss or litigation.
Risks Related to Liquidity and Capital Resources
Our business is dependent on external financing
Our business requires a substantial amount of cash to operate. We historically have obtained the cash required for operations through the sale of certain senior loans originated by us, borrowings by us or special purpose affiliates and the sale of our equity. Our ability to continue to rely on such sources or other sources of capital depends on numerous legal, economic, structural and other factors and failure to obtain the cash required for operations could have a material adverse impact on our business.

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Our secured and unsecured borrowing arrangements impose significant limitations on us
Our secured term loans (“Secured Term Loan Facility”) have scheduled amortization and mandatory prepayments in the event of a borrowing base deficiency or the issuance of new debt, and in certain cases, if there are realized proceeds from a portfolio company exit or excess cash flow. As of December 31, 2015, there was $441 million in principal outstanding under the Secured Term Loan Facility. Any loans that may be outstanding under our four-year $250 million secured revolving credit facility (“$250 Million Revolving Credit Facility”) are also subject to scheduled amortization after August 22, 2015 and mandatory prepayments in the event of a borrowing base deficiency.
The Secured Term Loan Facility and the $250 Million Revolving Credit Facility have covenants that in certain circumstances limit our ability to incur additional debt and liens, pay cash dividends, repurchase common stock, dispose of assets and make new investments and acquisitions. We are also prohibited from seeking to resume our status as a RIC and changing our regulatory status as a BDC. Both facilities require us to maintain a 100% borrowing base coverage. The $250 Million Revolving Credit Facility also includes other financial covenants that require us to maintain a maximum total leverage ratio not to exceed 0.75:1.00 and minimum adjusted EBITDA as defined in the $250 Million Revolving Credit Facility for ACAM. There can be no assurance that we will be able to maintain compliance with each of these covenants and a failure to do so could result in an event of default under the facilities. Other events of default under the Secured Term Loan Facility and the $250 Million Revolving Credit Facility include, without limitation, a payment default, an unremedied borrowing base deficiency, a cross default to our other facility, the cross acceleration of any debt in excess of an aggregate $50 million, the liquidation or bankruptcy of us or ACAM, the failure by us to conduct our asset management business through ACAM, one or more judgments in excess of an aggregate $50 million and a change of control.
The indenture relating to the issuance and sale by us of $350 million in aggregate principal amount of senior unsecured five-year notes (“Unsecured Private Notes”) contains restrictive covenants that, among other things, limit our ability to: (i) pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; (ii) incur additional debt and issue certain disqualified stock and preferred stock; (iii) incur certain liens; (iv) merge or consolidate with another company or sell substantially all of our assets; (v) enter into certain transactions with affiliates; and (vi) allow to exist certain restrictions on the ability of our subsidiaries to pay dividends or make other payments to us. The indenture also contains certain customary events of default. The occurrence of an event of default under the facilities could have a material adverse effect on our business, financial condition and results of operations.
The occurrence of an event of default under our borrowing arrangements could lead to termination of those facilities  
Our borrowing arrangements contain certain default provisions, some of which are described in the immediately preceding paragraphs. An event of default under our borrowing arrangements could result, among other things, in termination of further funds availability under the facility, liquidation of the assets securing the facility, an accelerated maturity date for all amounts outstanding and the disruption of all or a portion of the business financed by the facility. This could reduce our revenues and, by delaying any cash payment allowed to us under the facility until the lender has been paid in full, reduce our liquidity and cash flow.
The 1940 Act limits our ability to issue Senior Securities in certain circumstances
As a BDC, the 1940 Act generally limits our ability to issue Senior Securities if our asset coverage ratio does not exceed 200% immediately after each issuance of Senior Securities or is improved immediately upon the issuance. Asset coverage ratio is defined in the 1940 Act as the ratio that the value of the total assets, less all liabilities and indebtedness not represented by Senior Securities, bears to the aggregate amount of Senior Securities representing indebtedness. We have operated at times in the past with our asset coverage ratio below 200% and there are no assurances that we will always operate above this ratio. The resulting restrictions on issuing Senior Securities could have a material adverse impact on our business operations.
The 1940 Act limits our ability to issue equity below our NAV per share
As a BDC, the 1940 Act generally limits our ability to issue and sell our common stock at a price below our NAV per share, exclusive of any distributing commission or discount, without shareholder approval. Since 2008, shares of our common stock have traded below our NAV per share. While our common stock continues to trade at a price below our NAV per share, there are no assurances that we can issue or sell shares of our common stock if needed to fund our business. In addition, even in certain instances where we could issue or sell shares of our common stock at a price below our NAV per share, such issuance could result in dilution in our NAV per share, which could result in a decline of our stock price.
The lack of liquidity in our privately-held securities may adversely affect our business
Most of our investments consist of securities acquired directly from their issuers in private transactions. Some of these securities are subject to restrictions on resale or otherwise are less liquid than public securities. The illiquidity of our investments may make it difficult for us to obtain cash equal to the value at which we record our investments upon exiting the investment.

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Risks Related to Our Investing and Financing Strategy  
We have and may incur additional debt that could increase your investment risks
We and certain of our consolidated affiliates have borrowed or may borrow money or issue debt securities, which give our lenders and the holder of our debt securities fixed dollar claims on our assets or the assets of such consolidated affiliates that are senior to the claims of our shareholders and, thus, our lenders may have preference over our shareholders with respect to these assets. In particular, our consolidated affiliates may pledge assets to lenders from time to time under asset securitizations that are sold or contributed to separate affiliated statutory trusts prior to such pledge. While we may own a beneficial interest in these trusts, such assets will be the property of the respective trusts, available to satisfy the debts of the trusts, and would only become available for distribution to our shareholders to the extent specifically permitted under the agreements governing those term debt notes. Additionally, we have granted a security interest in substantially all of our non-securitized assets to the lenders of our Secured Term Loan Facility and $250 Million Revolving Credit Facility, which impose certain limitations on us.
The following table is designed to illustrate the effect on returns to a holder of our common stock of the leverage created by our use of borrowing, at the weighted average interest rate of 3.7% for the year ended December 31, 2015, and assuming hypothetical annual returns on our portfolio of minus 15% to plus 15%. As illustrated below, leverage generally increases the return to shareholders when the portfolio return is positive and decreases the return when the portfolio return is negative. Actual returns may be greater or less than those appearing in the table.
Assumed Return on Portfolio (Net of Expenses)(1)
(15%)
(10%)
(5%)
—%
5%
10%
15%
Corresponding Return to Stockholders(2)
(21%)
(15%)
(8%)
(2%)
5%
11%
18%
 
(1)
The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance.
(2)
In order to compute the “Corresponding Return to Shareholders,” the “Assumed Return on Portfolio” is multiplied by the total value of our assets at the beginning of the period to obtain an assumed return to us. From this amount, all interest expense accrued during the period is subtracted to determine the return available to shareholders. The return available to shareholders is then divided by the total value of our net assets as of the beginning of the period to determine the “Corresponding Return to Shareholders.”  
Although outstanding debt increases the potential for gain, it also increases the risk of loss of income or capital. This is the case, whether we are impacted by an increase or decrease in income or due to increases or decreases in asset values. Our ability to pay dividends is similarly impacted by outstanding debt.  
Our credit ratings may not reflect all risks of an investment in our debt securities
Our credit ratings are an assessment by major debt rating agencies of our ability to pay our obligations. Consequently, actual or expected changes in our credit ratings will likely affect the market value of our traded debt securities. Our credit ratings, however, may not fully or accurately reflect all of the credit and market risks associated with our outstanding debt securities.
We may not realize gains from our equity investments
We invest in equity assets with the goal to realize income and gains from the performance and disposition of these assets. Some or all of these equity assets may not produce income or gains; accordingly, we may not be able to realize income or gains from our equity assets.
Our portfolio companies may be highly leveraged with debt
The debt levels of our portfolio companies may have important adverse consequences to such companies and to us as an investor. Portfolio companies that are indebted may be subject to restrictive financial and operating covenants. The leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, their flexibility to respond to changing business and economic conditions and to business opportunities may be limited. A company’s income and net worth will tend to increase or decrease at a greater rate than if the company did not capitalize itself in part with debt.
One of our investments has subjected us to Nevada gaming regulation, which could affect our operations and changes in our ownership
Our portfolio company, Hard 8 Games, LLC (“Hard 8”), conducts activities that are subject to the Nevada Gaming Control Act and regulations of the Nevada Gaming Commission (“NGC”), the State Gaming Control Board (“GCB”), and the local laws, regulations and ordinances of various county and municipal regulatory authorities (collectively referred to as “the Nevada Gaming Authorities”). As a controlling member of Hard 8, we have been required to register with the Nevada Gaming Authorities as a publicly traded corporation and have been found suitable as a member of Hard 8. Also, certain of our officers and directors have

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been required to be found suitable and be licensed by the Nevada Gaming Authorities. We are required to make periodic reports to the Nevada Gaming Authorities and, in certain cases, may need to obtain the prior approval of the NGC for certain capital raising transactions.
In addition, beneficial holders of 5% or more of our voting securities may be required to make certain filings with the Nevada Gaming Authorities and beneficial holders of greater than 10% of our voting securities are required to file an application, be investigated, and be found suitable by the Nevada Gaming Authorities. Certain entities considered to be institutional investors who are holding our voting securities for investment purposes only may seek a waiver of this finding of suitability requirement. An applicant for licensing or a finding of suitability is required to pay all costs of the GCB investigation. Entities that fail to comply with these requirements may be guilty of a criminal offense. Thus, for so long as we are a controlling member of Hard 8, changes in control of American Capital through merger, consolidation, acquisition of assets or stock, management or otherwise may not occur without complying with Nevada law, including approval of the NGC. Also, persons having a material relationship or involvement with an entity proposing to acquire control of us would need to be investigated and licensed as part of the approval process relating to a change of control transaction.
Investments in non-investment grade Structured Products may be illiquid, may have a higher risk of default, and may not produce current returns
Our investments in Structured Products securities are generally non-investment grade. Non-investment grade Structured Products bonds and preferred shares tend to be illiquid, have a higher risk of default and may be more difficult to value than investment grade bonds. Recessions or poor economic or pricing conditions in the markets associated with Structured Products may cause higher defaults or losses than expected on these bonds and preferred shares. Non-investment grade securities are considered speculative, and their capacity to pay principal and interest in accordance with the terms of their issue is not certain.
Our assets include investments in Structured Products that are subordinate in right of payment to more senior securities  
Our assets include subordinated CLO, CDO and CMBS securities, which are subordinated classes of securities in a structure of securities secured by a pool of loans. Accordingly, such securities are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Thus, there is generally only a nominal amount of equity or other debt securities junior to our positions, if any, issued in such structures. Additionally, the estimated fair values of our subordinated interests tend to be much more sensitive to changes in economic conditions than more senior securities. 
The trading market or market value of our debt securities may fluctuate
Many factors may materially adversely affect the trading market for, and market value of, our debt securities including, but not limited to, the following:
future defaults under the securities;
our creditworthiness;
the time remaining to the maturity of these debt securities;  
the outstanding principal amount of debt securities with terms identical to these debt securities;
the supply of debt securities trading in the secondary market, if any;
the redemption or repayment features, if any, of these debt securities;
the level, direction and volatility of market interest rates generally; and
market rates of interest that are higher or lower than rates borne by the debt securities.
There may also be a limited number of buyers when an investor decides to sell its debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities.
We may issue preferred stock in the future to help finance our business, which would magnify the potential for gain or loss and the risks of investing in us in the same way as our borrowings
Preferred stock, which is another form of leverage, has the same risks to our common shareholders as borrowings because the dividends on any preferred stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common shareholders, and preferred shareholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference.

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We have restrictions on the type of assets we can invest in as a BDC
As a BDC, we may not acquire any assets other than certain qualifying assets described in the 1940 Act, unless, at the time of and after giving effect to the acquisition, at least 70% of our total assets consist of such qualifying assets. Thus, in certain instances, we may be precluded from investing in potentially attractive investments that are not qualifying assets for purposes of the 1940 Act. In addition, there is a risk that this restriction could prevent us from making additional investments in our existing non-qualifying investments, which could cause our position to be diluted or limit the access to capital of our non-qualifying investments.
There are conflicts of interest with other funds that we manage 
Through our wholly-owned portfolio company, ACAM, we manage various funds that may compete with us for investments. Although we have policies in place to seek to mitigate the effects of conflicts of interest, these policies will not eliminate the conflicts of interest that our officers and employees and the officers and employees of our fund managers and affiliates will face in making investment decisions on behalf of American Capital or any other American Capital-sponsored investment vehicles. Further, we do not have any agreement or understanding with our funds that would give us any priority over them in opportunities to invest in overlapping investments. Accordingly, we may compete for access to investments with other funds that we manage.
Risks Related to Our Common Stock  
We may not pay any cash dividends
We are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains beginning with our tax year ended September 30, 2011, and are not subject to the annual distribution requirements under Subchapter M of the Code. We have not paid a cash dividend during the last four fiscal years ended December 31, 2015 and there can be no assurance that we will pay any cash dividends in the future as we may retain our earnings to facilitate the growth of our business, to invest, to provide liquidity, to repurchase our shares or for other corporate purposes.
Future equity issuances may be on terms adverse to shareholder interests  
We may issue equity capital at prices below our NAV per share with shareholder approval. As of the date of this filing, we do not have such authorization; however, we may seek such approval in the future or we may elect to conduct a rights offering, which would not require shareholder approval under the 1940 Act. If we issue any shares of common stock below our NAV per share, the interests of our existing shareholders may be diluted. Any such dilution could include a reduction in our NAV per share as a result of the issuance of shares at a price below the NAV per share and a decrease in a shareholder’s interest in our earnings and assets and voting interest. As of December 31, 2015, the closing price of our common stock was below our NAV per share.
The following table is designed to illustrate the dilutive effect on NAV per share if we issue shares of common stock below our NAV per share. The table below reflects NAV per share diluted for the hypothetical issuance of 50,000,000 shares of common stock (about 19% of outstanding shares as of December 31, 2015), at hypothetical sales prices of 5%, 10%, 15%, 20%, 25% and 50% below the December 31, 2015 NAV of $19.88 per share.
Assumed sales price per share below NAV per share(1)
(50%)
(25%)
(20%)
(15%)
(10%)
(5%)
Diluted NAV per share
$18.18
$19.03
$19.20
$19.37
$19.54
$19.71
% Dilution
(8.5%)
(4.3%)
(3.4%)
(2.6%)
(1.7%)
(0.9%)
 
(1)
The assumed sales price per share is assumed to be net of any applicable underwriting commissions or discounts.  
The market price of our common stock may fluctuate significantly  
The market price and marketability of shares of our securities may from time to time be significantly affected by numerous factors, including many over which we have no control and that may not be directly related to us. These factors include the following:
price and volume fluctuations in the stock market from time to time, which are often unrelated to the operating performance of particular companies;
defaulting on our debt covenants;
significant volatility in the market price and trading volume of securities of BDCs, financial service companies, asset managers or other companies in our sector, which is not necessarily related to the operating performance of particular companies;

26


changes in laws, regulatory policies, tax guidelines or financial accounting standards, particularly with respect to BDCs;
changes in our earnings or variations in operating results;
any shortfall in revenue or net income or any increase in losses from levels expected by securities analysts and the market in general;
decreases in our NAV per share;
general economic trends and other external factors; and
loss of a major funding source.
Fluctuations in the trading price of our common stock may adversely affect the liquidity of the trading market for our common stock and, in the event that we seek to raise capital through future equity financings, our ability to raise such equity capital.
Our common stock may be difficult to resell  
Investors may not be able to resell shares of common stock at or above their purchase prices due to a number of factors, including:
actual or anticipated fluctuation in our operating results;
volatility in our common stock price;
changes in expectations as to our future financial performance or changes in financial estimates of securities analysts; and
departures of key personnel.  
Provisions of our Charter and Bylaws could deter takeover attempts
Our charter and bylaws and the Delaware General Corporation Law contain certain provisions that may have the effect of discouraging and delaying or making more difficult a change in control. For example, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested shareholders except in certain cases. The existence of these provisions may negatively impact the price of our common stock and may discourage third-party bids. These provisions may also reduce any premiums paid to our shareholders for shares of our common stock that they own.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
We do not own any real estate or other physical properties materially important to our operations. We lease office space in six locations for terms ranging up to eleven years.
Item 3.
Legal Proceedings
Neither we, nor any of our consolidated subsidiaries, are currently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us or any consolidated subsidiary, other than routine litigation and administrative proceedings arising in the ordinary course of business. Such proceedings are not expected to have a material adverse effect on the business, financial conditions, or results of our operations.
Item 4.
Mine Safety Disclosures
Not applicable.

27


PART II.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  
Quarterly Stock Prices
Our common stock is quoted on The NASDAQ Global Select Market under the ticker symbol “ACAS”. As of January 29, 2016, we had 642 shareholders of record. Most of the shares of our common stock are held by brokers and other institutions on behalf of shareholders. We believe that there are approximately 66,000 additional beneficial holders of our common stock. During the years ended December 31, 2015 and 2014, we did not declare any dividends on our common stock. The following table sets forth the range of quarterly high and low sales prices of our common stock as reported on The NASDAQ Global Select Market for the years ended December 31, 2015 and 2014:
 
Sales Prices
 
High
 
Low
2015
 
 
 
First Quarter
$
15.34

 
$
13.93

Second Quarter
$
15.36

 
$
13.54

Third Quarter
$
14.47

 
$
11.92

Fourth Quarter
$
15.87

 
$
12.09

 
 
 
 
2014
 
 
 
First Quarter
$
16.37

 
$
14.01

Second Quarter
$
16.03

 
$
14.24

Third Quarter
$
15.77

 
$
14.16

Fourth Quarter
$
16.10

 
$
13.59

Share Repurchase Program
During 2011, our Board of Directors adopted a program that may provide for share repurchases or dividend payments, but suspended repurchases in March 2014. During the first quarter of 2015, our Board of Directors reinstated authorization for share repurchases. Our Board of Directors modified the Program during the fourth quarter of 2015 to authorize the purchase of $600 million to $1 billion of common stock through June 30, 2016 at prices per share below 85% of our most recent quarterly NAV per share, subject to certain conditions. We have entered into a Rule 10b5-1 trading plan to undertake accretive share repurchases on a non-discretionary basis up to the $1 billion limit. The following table provides information for the quarter ended December 31, 2015, regarding shares of our common stock that we repurchased in the open market and were subsequently retired (in millions, except per share amounts):
 
Total Number of Shares Purchased(1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
 
Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
November 6, 2015 through November 30, 2015
7.3

 
$
14.68

 
7.3

 
N/A
December 1, 2015 through December 31, 2015
13.4

 
$
14.30

 
13.4

 
N/A
Fourth Quarter 2015
20.7

 
$
14.44

 
20.7

 
N/A

(1)
All shares were purchased by us pursuant to the share repurchase program described in footnote 2 below.
(2)
Under the program, we will consider quarterly setting an amount to be utilized for share repurchases.

Dividend Reinvestment Plan
At the option of a holder of record of common stock, all cash distributions can be reinvested automatically under our dividend reinvestment plan (“DRIP”) in additional whole and fractional shares. Pursuant to our DRIP, a shareholder whose shares are registered in his own name may opt in to the plan and elect to reinvest all or a portion of his or her dividends in shares of our common stock by providing the required enrollment notice to the plan administrator, Computershare Investor Services.

28


Shareholders whose shares are held in the name of a broker or the nominee of a broker may have distributions reinvested only if such service is provided by the broker or the nominee, or if the broker or the nominee permits participation in our DRIP. Shareholders whose shares are held in the name of a broker or other nominee should contact the broker or nominee for details. Shareholders that participate in the DRIP will receive the number of whole or fractional shares that can be obtained based on the price per share the plan administrator purchases the shares of common stock. Such shares will be acquired by the plan administrator through either receipt of newly issued shares or treasury shares from us or by purchase of outstanding shares of common stock on the open market. If the market price per share of our common stock on the dividend payment date does not exceed 110% of the NAV per share of our common stock as of the end of the most recently completed fiscal quarter (or as of such other time as may be determined by our Board of Directors), then our plan administrator will acquire shares of our common stock directly from us at a price equal to the greater of NAV per share or the market price on that date at a 2% discount. However, (i) if the market price per share of our common stock on the dividend payment date does not exceed 110% of the NAV per share of our common stock as of the end of the most recently completed fiscal quarter or (ii) if we advise the plan administrator that since such NAV per share was last determined we have become aware of events that indicate the possibility of a change in NAV per share as a result of which the NAV per share of the common stock on the dividend payment date might be higher than the current market price per share of our common stock, then the plan administrator will not acquire any newly issued shares from us at a discount and instead will buy shares of our common stock in the open market. You can find out more information about the DRIP by reading our Third Amended and Restated Dividend Reinvestment Plan, a copy of which is located on our internet website at www.AmericanCapital.com.
Our stock transfer agent, registrar and DRIP administrator is Computershare Investor Services. Requests for information from Computershare can be sent to Computershare Investor Services, P.O. Box 30170, College Station, TX 77842-3170, or calling (800) 733-5001 (U.S. and Canada) (781) 575-3400 (outside U.S. and Canada) or through the Internet, at www.computershare.com.
For the three fiscal years ended December 31, 2015, we have not sold any equity securities that were not registered under the Securities Act.
Equity Compensation Plans
The following table summarizes information, as of December 31, 2015, relating to our equity compensation plans pursuant to which grants of options or other rights to acquire shares of our common stock may be granted from time to time. See Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements for a description of our equity compensation plans (shares in millions).
Plan category
 
Number of securities to be issued upon exercise of outstanding options
 
Weighted-average exercise price of outstanding options
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column of this table)
Equity compensation plans approved by security holders(1)
 
32.2

 
$
9.66

 
4.1

Equity compensation plans not approved by security holders(1)
 

 

 

Total
 
32.2

 
$
9.66

 
4.1

(1)
All of our equity compensation plans have been approved by our shareholders.


29


Performance Graph
The performance graph below compares the total cumulative shareholder return on our common stock with the cumulative shareholder return on the equity securities of companies included in the Standard & Poor’s 500 Stock Index (“S&P 500”), S&P 500 Financials Sector Index and BDC Peer Group, measured as of the last trading day of each year shown. The performance graph represents past performance and should not be considered to be an indication of future performance.
The preceding graph and the following table compares a shareholder’s cumulative total return for the last five fiscal years, assuming $100 invested as of December 31, 2010, with the reinvestment of all dividends without commissions, as if such amounts had been invested in: (i) our common stock; (ii) the stocks included in the S&P 500; (iii) the stocks included in the S&P 500 Financials Sector Index; and (iv) an index of selected issuers in our BDC Peer Group, composed of Apollo Investment Corporation, Ares Capital Corporation, BlackRock Kelso Capital Corporation, PennantPark Investment Corporation and Prospect Capital Corporation.
 
Cumulative Total Return
 
12/10
 
12/11
 
12/12
 
12/13
 
12/14
 
12/15
AMERICAN CAPITAL
$
100

 
$
89

 
$
159

 
$
207

 
$
193

 
$
182

S&P 500
100

 
102

 
118

 
157

 
178

 
181

S&P 500 FINANCIALS SECTOR INDEX
100

 
83

 
107

 
145

 
167

 
164

BDC PEER GROUP
100

 
91

 
115

 
141

 
138

 
126


30


Item 6.Selected Financial Data
AMERICAN CAPITAL, LTD.
Consolidated Selected Financial Data
(in millions, except per share data)
 
The selected financial data should be read in conjunction with our audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K and notes thereto.
 
As of and For the Year Ended December 31, 
 
2015
 
2014
 
2013
 
2012
 
2011
Total operating revenue
$
671

 
$
471

 
$
487

 
$
646

 
$
591

Total operating expenses
293

 
288

 
255

 
263

 
288

Net operating income before income taxes
378

 
183

 
232

 
383

 
303

Tax (provision) benefit(1)
(125
)
 
(66
)
 
(76
)
 
14

 
145

Net operating income (“NOI”)
253

 
117

 
156

 
397

 
448

Loss on extinguishment of debt, net of tax

 

 

 
(3
)
 

Net realized (loss) gain, net of tax(1)
(627
)
 
152

 
(55
)
 
(270
)
 
(310
)
Net realized (loss) earnings
(374
)
 
269

 
101

 
124

 
138

Net unrealized appreciation, net of tax(1)
187

 
165

 
83

 
1,012

 
836

Net (decrease) increase in net assets resulting from operations (“Net (loss) earnings ”)
$
(187
)
 
$
434

 
$
184

 
$
1,136

 
$
974

 
 

 
 
 
 

 
 

 
 

Per share data:
 

 
 
 
 

 
 

 
 

NOI:
 

 
 
 
 

 
 

 
 

Basic
$
0.95

 
$
0.44

 
$
0.53

 
$
1.24

 
$
1.30

Diluted
$
0.95

 
$
0.42

 
$
0.51

 
$
1.20

 
$
1.26

Net (loss) earnings:
 
 
 
 
 

 
 

 
 

Basic
$
(0.70
)
 
$
1.62

 
$
0.63

 
$
3.55

 
$
2.83

Diluted
$
(0.70
)
 
$
1.55

 
$
0.61

 
$
3.44

 
$
2.74

Balance sheet data:
 

 
 

 
 

 
 

 
 

Total assets
$
6,244

 
$
7,640

 
$
6,009

 
$
6,319

 
$
5,961

Total debt
$
1,257

 
$
1,703

 
$
791

 
$
775

 
$
1,251

Total shareholders’ equity
$
4,822

 
$
5,472

 
$
5,126

 
$
5,429

 
$
4,563

NAV per share
$
19.88

 
$
20.50

 
$
18.97

 
$
17.84

 
$
13.87

Other data (unaudited):
 

 
 

 
 

 
 

 
 

Number of portfolio companies at period end
171

 
402

 
132

 
139

 
152

New investments(2)
$
3,305

 
$
3,610

 
$
1,107

 
$
719

 
$
317

Realizations(3)
$
3,721

 
$
2,765

 
$
1,208

 
$
1,498

 
$
1,066

Weighted average effective interest rate on debt investments at period end(4)
8.4
 %
 
6.6
%
 
10.0
%
 
11.4
%
 
10.7
%
NOI return on average shareholders’ equity(5)
4.8
 %
 
2.2
%
 
2.9
%
 
7.7
%
 
10.7
%
Net realized (loss) earnings return on average shareholders’ equity(5)
(7.1
)%
 
5.1
%
 
1.9
%
 
2.4
%
 
3.3
%
Net (loss) earnings return on average shareholders’ equity(5)
(3.5
)%
 
8.2
%
 
3.4
%
 
22.1
%
 
23.3
%
Assets under management(6)
$
73,342

 
$
86,422

 
$
93,210

 
$
116,800

 
$
68,106

Earning assets under management(7)
$
20,711

 
$
22,107

 
$
18,603

 
$
18,642

 
$
13,496

(1)
Beginning in 2011, we were no longer taxed as a RIC under Subchapter M of the Code and instead became subject to taxation as a corporation under Subchapter C of the Code. As a result, we recorded a net deferred tax asset of $428 million in 2011 comprised of a deferred tax benefit of $145 million in NOI, $75 million in net realized (loss) gain and $208 million in net unrealized appreciation.
(2)
New investments include amounts as of the investment dates that are committed.
(3)
Realizations represent cash proceeds received upon the exit of investments including payment of scheduled principal amortization, debt prepayments, proceeds from loan syndications and sales, payment of accrued PIK notes, and dividends and payments associated with accreted original issue discounts (“OID”) and sale of equity and other securities.

31


(4)
Weighted average effective interest rate on debt investments as of period end is computed as (a) annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt investments, divided by (b) total debt investments at amortized cost.
(5)
Return represents net increase or decrease in net assets resulting from operations. Average equity is calculated based on the quarterly shareholders' equity balances.
(6)
Assets under management include both (i) the total assets of American Capital and (ii) the total assets of the funds under management by ACAM, excluding any direct investment we have in those funds.
(7)
Earning assets under management include both (i) the total assets of American Capital and (ii) the total third-party earning assets under management by ACAM from which the associated base management fees are calculated, excluding any direct investment we have in those funds.






32


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (in millions, except per share data)
Forward-Looking Statements
All statements contained herein that are not historical facts including, but not limited to, statements regarding anticipated activity are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: (i) changes in the economic conditions in which we operate negatively impacting our financial resources; (ii) certain of our competitors have greater financial resources than us, reducing the number of suitable investment opportunities offered to us or reducing the yield necessary to consummate the investment; (iii) there is uncertainty regarding the value of our privately-held securities that require our good faith estimate of fair value, and a change in estimate could affect our NAV; (iv) our investments in securities of privately-held companies may be illiquid, which could affect our ability to realize the investment; (v) our portfolio companies could default on their loans or provide no returns on our investments, which could affect our operating results; (vi) we use external financing to fund our business, which may not always be available; (vii) our ability to retain key management personnel; (viii) an economic downturn or recession could impair our portfolio companies and therefore harm our operating results; (ix) our borrowing arrangements impose certain restrictions; (x) changes in interest rates may affect our cost of capital and NOI; (xi) we cannot incur additional indebtedness unless immediately after a debt issuance we maintain an asset coverage of at least 200%, or equal to or greater than our asset coverage prior to such issuance, which may affect returns to our shareholder; (xii) our common stock price may be volatile; and (xiii) general business and economic conditions and other risk factors described in our reports filed from time to time with the SEC. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, please see the information under the caption “Risk Factors” described in this Annual Report on Form 10-K. We caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.
Investing Activity
We primarily invest in senior and mezzanine debt and equity of middle and large market companies. We and ACAM also invest in assets that can be sold or contributed to public or private funds that ACAM could manage, as a means of “incubating” such funds. We also have investments in Structured Products, including CLO, CDO and CMBS securities and invest in funds managed by us.
We seek to be a long-term partner with our portfolio companies. As a long-term partner, we will invest capital in a portfolio company subsequent to our initial investment if we believe that it can achieve appropriate returns for our investment. Add-on financings to our portfolio companies fund (i) strategic acquisitions by a portfolio company of either a complete business or specific lines of a business that are related to the portfolio company’s business, (ii) recapitalization of a portfolio company to raise financing on better terms, buyout one or several owners or to pay a dividend, (iii) growth of the portfolio company such as product development or plant expansions, or (iv) working capital for a portfolio company, sometimes in distressed situations, that needs capital to fund operating costs, debt service or growth in receivables or inventory.
The total fair value of our investment portfolio was $5.0 billion, $6.3 billion and $5.1 billion as of December 31, 2015, 2014 and 2013, respectively. Our new investments totaled $3.3 billion, $3.6 billion and $1.1 billion during the years ended December 31, 2015, 2014 and 2013, respectively.


33


The amounts of our new investments are based on committed amounts as of the investment date. The aggregate dollar amount of new investments by type, use and business line were as follows (in millions):
Type
2015
 
2014
 
2013
 First Lien Senior Debt
$
1,823

 
$
2,039

 
$
103

 Second Lien Senior Debt
355

 
589

 
511

 Mezzanine Debt
76

 
10

 

 Preferred Equity
202

 
35

 
125

 Common Equity
471

 
405

 
236

 Structured Products
378

 
532

 
132

       Total by security type
$
3,305

 
$
3,610

 
$
1,107

Use
2015
 
2014
 
2013
Senior Floating Rate Loans
$
1,144

 
$
1,891

 
$

Sponsor Finance and Other Investments
823

 
622

 
157

Structured Products
378

 
512

 
75

European Capital(1)
367

 
39

 

American Capital One Stop Buyouts®

 

 
27

Investments in ACAM and Fund Development
254

 
400

 
239

Add-on financing for growth and working capital
131

 
128

 
56

Add-on financing for ACE buybacks
145

 

 

Add-on financing for recapitalizations, not including distressed investments
46

 
4

 
104

Add-on financing for working capital in distressed situations
12

 
14

 
42

Add-on financing for acquisitions
5

 

 
391

Add-on financing for purchase of debt of a portfolio company

 

 
16

       Total by use
$
3,305

 
$
3,610

 
$
1,107

Business Line
2015
 
2014
 
2013
Senior Floating Rate Loans
$
1,144

 
$
1,891

 
$

Sponsor Finance and Other Investments
965

 
726

 
290

Structured Products
378

 
512

 
75

European Capital(1)
367

 
39

 

Investments in ACAM and Fund Development
254

 
400

 
239

American Capital One Stop Buyouts®
197

 
42

 
503

       Total by business line
$
3,305

 
$
3,610

 
$
1,107

(1)
Effective October 1, 2014, European Capital’s financial results have been consolidated with the financial results of American Capital.

34


We received cash proceeds from realizations and repayments of portfolio investments by source and business line as follows (in millions):
Source
2015
 
2014
 
2013
Loan syndications and sales
$
2,357

 
$
98

 
$
41

Scheduled principal amortization
470

 
56

 
14

Principal prepayments
445

 
699

 
604

Equity investments
388

 
1,523

 
362

Payment of accrued PIK notes and dividend and accreted OID
61

 
389

 
187

Total by source
$
3,721

 
$
2,765

 
$
1,208

Business Line
2015
 
2014
 
2013
Senior Floating Rate Loans
$
2,347

 
$
163

 
$

Structured Products
470

 
192

 
27

European Capital(1)
467

 
651

 
195

Sponsor Finance and Other Investments
199

 
386

 
444

American Capital One Stop Buyouts®
197

 
1,167

 
530

American Capital Asset Management
41

 
206

 
12

Total by business line
$
3,721

 
$
2,765

 
$
1,208

(1)
Effective October 1, 2014, European Capital’s financial results have been consolidated with the financial results of American Capital. Prior to October 1, 2014, European Capital business line cash proceeds were comprised of dividend distributions on our equity investment in European Capital. Effective October 1, 2014, European Capital business line cash proceeds are comprised of cash proceeds from realizations and repayments on European Capital’s portfolio investments.



35


Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements included in this Annual Report on Form 10-K and the notes thereto.
Our consolidated financial performance, as reflected in our consolidated statements of operations, is composed of the following three primary elements:
The first element is “NOI,” which is primarily the interest, dividends, prepayment fees, finance and transaction fees and portfolio company management fees earned from investing in debt and equity securities and the fees we earn from fund asset management, less our operating expenses and provision or benefit for income taxes.
The second element is “Net realized gain (loss),” which reflects the difference between the proceeds from an exit of an investment and the cost at which the investment was carried on our consolidated balance sheets and periodic interest settlements and termination receipts or payments on derivatives, foreign currency transaction gains or losses and taxes on realized gains or losses.
The third element is “Net unrealized appreciation (depreciation),” which is the net change in the estimated fair value of our portfolio investments and of our interest rate derivatives at the end of the period compared with their estimated fair values at the beginning of the period or their stated costs, as appropriate, and taxes on unrealized gains or losses. In addition, our net unrealized depreciation includes the foreign currency translation from converting the cost basis of our assets and liabilities denominated in a foreign currency to the U.S. dollar.
The consolidated operating results were as follows (in millions):
 
2015
 
2014
 
2013
Operating revenue
$
671

 
$
471

 
$
487

Operating expenses
293

 
288

 
255

NOI before income taxes
378

 
183

 
232

Tax provision
(125
)
 
(66
)
 
(76
)
NOI
253

 
117

 
156

Net realized (loss) gain, net of tax
(627
)
 
152

 
(55
)
Net realized (loss) earnings
(374
)
 
269

 
101

Net unrealized appreciation, net of tax
187

 
165

 
83

Net (loss) earnings
$
(187
)
 
$
434

 
$
184


36


Operating Revenue
We derive the majority of our operating revenue from our investments in senior and mezzanine debt and equity of middle market companies and our investments in Structured Products, as well as dividend income from our fund management business which is conducted through ACAM.
Operating Revenue by Business Line
Operating revenue by business line was as follows (in millions):
Business Line
2015
 
2014
 
2013
American Capital Asset Management
$
152

 
$
111

 
$
133

American Capital One Stop Buyouts®
141

 
194

 
145

Sponsor Finance and Other Investments
132

 
56

 
131

Structured Products
105

 
65

 
72

Senior Floating Rate Loans
84

 
33

 

European Capital(1)
57

 
12

 
6

          Total by business line
$
671

 
$
471

 
$
487

 ——————————
(1)
Effective October 1, 2014, European Capital’s financial results have been consolidated with the financial results of American Capital.

American Capital Asset Management
Interest, dividend and fee income from ACAM increased by $41 million, or 37%, for the year ended December 31, 2015 over the comparable period in 2014, primarily due to $26 million of incentive fees received from ACE I and ACE III, as well as an increase in the funds under management of ACAM, primarily ACE III, ACAS CLO 2014-1, ACAS CLO 2014-2, ACAS CLO 2015-1 and ACAS CLO 2015-2. Interest, dividend and fee income from ACAM decreased by $22 million, or 17%, for the year ended December 31, 2014 over the comparable period in 2013, primarily due to reduced dividend income for the management of AGNC and MTGE due to a decrease in the assets under management for these funds as well as increased costs associated with fund development activities. This was partially offset by an increase in the funds under management of ACAM, primarily ACSF, ACAS CLO 2013-1, ACAS CLO 2013-2, ACAS CLO 2014-1 and ACAS CLO 2014-2.
American Capital One Stop Buyouts® 
Interest, dividend and fee income from our American Capital One Stop Buyouts® decreased by $53 million, or 27%, for the year ended December 31, 2015 over the comparable period in 2014, primarily due to the sale of our equity-related investments to ACE III on April 28, 2014, as well as exits of other American Capital One Stop Buyouts®. Interest, dividend and fee income from our American Capital One Stop Buyouts® increased by $49 million, or 34%, for the year ended December 31, 2014 over the comparable period in 2013, primarily due to additional dividend income as a result of the removal of certain preferred equity securities from non-accrual status as a result of improved portfolio company performance.
Sponsor Finance and Other Investments
Interest, dividend and fee income from our Sponsor Finance and Other Investments increased by $76 million, or 136%, for the year ended December 31, 2015 over the comparable period in 2014, primarily due to a $477 million increase in our weighted average debt investments at cost as well as a net positive impact of $43 million from non-accrual investments for the year ended December 31, 2015 over the comparable period in 2014. Interest, dividend and fee income from our Sponsor Finance Investments decreased by $75 million, or 57%, for the year ended December 31, 2014 over the comparable period in 2013, primarily due to a net negative impact of $58 million from non-accrual investments in 2014 compared to 2013.
Structured Products
Interest income on Structured Products investments increased by $40 million, or 62%, for the year ended December 31, 2015 over the comparable period in 2014, primarily due to higher actual and projected payments on our CLO investments as well as an increase in our weighted average Structured Products investments at cost. During 2015, we realized cash proceeds of $470 million and recognized interest income of $105 million from our Structured Products investments. Interest income on Structured Products investments decreased by $7 million, or 10%, for the year ended December 31, 2014 over the comparable period in 2013, primarily due to the accelerated recognition of income on CLO investments in 2013 due to higher projected payments. During 2014, we realized cash proceeds of $192 million and recognized interest income of $65 million from our Structured Products investments. Our weighted average Structured Products investments outstanding increased by $214 million, or 47%, for the year

37


ended December 31, 2015 over the comparable period in 2014, primarily as a result of new investments in CLO securities. Our weighted average Structured Products investments outstanding increased by $83 million, or 22%, for the year ended December 31, 2014 over the comparable period in 2013, primarily as a result of new investments in CLO securities.
Interest income on Structured Products is recognized using the effective interest method as required by FASB ASC Subtopic 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets (“ASC 325-40”). Under ASC 325-40, at the time of purchase, we estimate the future expected cash flows and determine the effective yield of an investment based on these estimated cash flows and the cost basis of the investment. Subsequent to the purchase, these estimated cash flows are updated quarterly and a revised effective yield is calculated prospectively in accordance with ASC 320-10-35, Investment-Debt and Equity Securities. In the event that the fair value of an investment decreases below its current amortized cost basis, we may be required to write down the current amortized cost basis for a credit loss or to fair value depending on our hold expectations for the investment. Current amortized cost basis less the amount of any write down (“Reference Amount”) is used to calculate the effective yield used for interest income recognition purposes over the remaining life of the investment. We are precluded from reversing write downs for any subsequent increase in the expected cash flows of an investment with the effect of increasing total interest income over the life of the investment and increasing the realized loss recorded on the sale or redemption of the investment by the amount of the credit loss write down. During the year ended December 31, 2015, we recorded $20.5 million in credit loss write downs to current amortized cost basis on six Structured Products investments. As of December 31, 2015, in aggregate, the amortized cost basis of our Structured Products investment portfolio exceeded the Reference Amount by approximately $109 million.
See Note 2—Interest and Dividend Income Recognition policy to our audited consolidated financial statements included in this Annual Report on Form 10-K for a description of how projected cash flows affect revenue recognition on our Structured Products investments.
Senior Floating Rate Loans
We initiated our Senior Floating Rate Loan portfolio in 2014 and purchased $3.0 billion of investments through December 31, 2015. During the fourth quarter of 2015, we substantially liquidated our Senior Floating Rate Loan portfolio. Interest income on these loans was $84 million and $33 million for the years ended December 31, 2015 and 2014, respectively. The monthly weighted average effective interest rate on our Senior Floating Rate Loan portfolio was 4.6% and 3.8% for the years ended December 31, 2015 and 2014, on a monthly weighted average balance of $1,807 million and $882 million, respectively.
European Capital
European Capital’s operating revenue for the year ended December 31, 2015 was $57 million, comprised of $33 million of interest income on European Capital debt investments, $20 million of dividend income on European Capital equity investments and $4 million of income on European Capital CLO investments. European Capital’s operating revenue for the fourth quarter of 2014 was $12 million, comprised of $11 million of interest income on European Capital debt investments and $1 million of income on European Capital CLO investments. We did not receive any interest income on our investment in European Capital prior to the consolidation of European Capital on October 1, 2014. We received interest income from European Capital of $6 million for the year ended December 31, 2013 related to interest payments on our unsecured revolving credit facility with European Capital.
For the year ended December 31, 2015, European Capital recorded additional interest income on uncollected PIK interest income recorded in prior periods of $15 million, as a result of debt investments being removed from non-accrual. For the fourth quarter of 2014, European Capital recorded additional interest income on uncollected PIK interest income recorded in prior periods of $3 million, as a result of debt investments being removed from non-accrual.
American Capital Operating Revenue (excluding the financial results related to the consolidation of European Capital)
 
2015
 
2014
 
2013
Interest income on debt investments
$
270

 
$
190

 
$
209

Interest income on Structured Products investments
105

 
65

 
72

Dividend income from equity investments, excluding ACAM
49

 
63

 
36

Dividend income from ACAM
125

 
82

 
105

Other interest income
1

 
1

 
1

Interest and dividend income
550

 
401

 
423

Portfolio company advisory and administrative fees
14

 
10

 
17

Advisory and administrative services – ACAM
26

 
27

 
26

Other fees
24

 
21

 
21

Fee income
64

 
58

 
64

Total operating revenue
$
614

 
$
459

 
$
487


38


American Capital Interest and Dividend Income (excluding the financial results related to the consolidation of European Capital)
The following table summarizes selected data for our debt (excluding SFRL investments), Structured Products and equity investments outstanding, at cost (dollars in millions):
 
2015
 
2014
 
2013
Debt investments at cost(1)
$
1,982

 
$
1,636

 
$
1,804

Average non-accrual debt investments at cost(2)
$
186

 
$
272

 
$
302

Effective interest rate on debt investments
9.4
%
 
9.6
%
 
11.6
%
Effective interest rate on debt investments, excluding non-accrual prior period adjustments
9.0
%
 
10.2
%
 
10.8
%
Structured Products investments at cost(1)
$
667

 
$
453

 
$
369

Effective interest rate on Structured Products investments
15.8
%
 
14.4
%
 
19.5
%
Debt and Structured Products investments at cost(1)
$
2,649

 
$
2,089

 
$
2,173

Effective interest rate on debt and Structured Products investments
11.0
%
 
10.7
%
 
12.9
%
Average daily one-month LIBOR
0.2
%
 
0.2
%
 
0.2
%
Equity investments at cost(1)(3)
$
884

 
$
1,557

 
$
2,025

Effective dividend yield on equity investments(3)
5.6
%
 
4.0
%
 
1.8
%
Effective dividend yield on equity investments, excluding non-accrual prior period adjustments(3)
3.9
%
 
4.2
%
 
4.1
%
Debt, Structured Products and equity investments at cost(1)(3)
$
3,533

 
$
3,646

 
$
4,198

Effective yield on debt, Structured Products and equity investments(3)
9.7
%
 
7.8
%
 
7.6
%
Effective yield on debt, Structured Products and equity investments, excluding non-accrual prior period adjustments(3)
9.0
%
 
8.2
%
 
8.3
%
 ——————————
(1)
Monthly weighted average of investments at cost. Excludes SFRL investments.
(2)
Quarterly average of investments at cost.
(3)
Excludes our equity investment in ACAM and our investment in European Capital through September 30, 2014.

Debt Investments
Interest income on debt investments increased by $80 million, or 42%, for the year ended December 31, 2015 over the comparable period in 2014, primarily due to a $51 million increase in interest income on our Senior Floating Rate Loan portfolio as well as a net positive impact from non-accrual investments for the year ended December 31, 2015 over the comparable period in 2014. Our weighted average debt investments outstanding, excluding SFRL investments, increased by $346 million for the year ended December 31, 2015 over the comparable period in 2014, primarily as a result of new Sponsor Finance investments in 2015 as well as the repayment or sale of debt investments in 2014. The average non-accrual debt investments outstanding decreased from $272 million during 2014 to $186 million during 2015.
Interest income on debt investments decreased by $19 million, or 9%, for the year ended December 31, 2014 over the comparable period in 2013, primarily due to the net negative impact from non-accrual investments in 2014 compared to 2013. Interest income on our Senior Floating Rate Loan portfolio for the year ended December 31, 2014 was $33 million. Our weighted average debt investments outstanding, excluding SFRL investments, decreased by $168 million for the year ended December 31, 2014 over the comparable period in 2013, primarily as a result of repayment or sale of debt investments. The average non-accrual debt investments outstanding decreased from $302 million during 2013 to $272 million during 2014.
When a debt investment is placed on non-accrual, we may record reserves on uncollected PIK interest income recorded in prior periods as a reduction of interest income in the current period. Conversely, when a debt investment is removed from non-accrual, we may record interest income in the current period on prior period uncollected PIK interest income which was reserved in prior periods. For the year ended December 31, 2015, we recorded additional interest income on uncollected PIK interest income recorded in prior periods of $8 million as a result of debt investments being removed from non-accrual, which had an approximate 40 basis point positive impact on the effective interest rate on debt investments. For the year ended December 31, 2014, we recorded a net reserve on uncollected PIK interest income recorded in prior periods of $10 million as a result of debt investments being placed on non-accrual, which had an approximate 60 basis point negative impact on the effective interest rate on debt investments. For the year ended December 31, 2013, we recorded additional interest income on uncollected PIK interest income recorded in prior periods of $14 million as a result of debt investments being removed from non-accrual, which had an approximate 80 basis point positive impact on the effective interest rate on debt investments.

39


Equity Investments, Excluding ACAM
Dividend income from equity investments, excluding ACAM, decreased by $14 million, or 22%, for the year ended December 31, 2015 over the comparable period in 2014, due to the following:
a decrease of $673 million in weighted average equity investments at cost as of December 31, 2015 compared to December 31, 2014 primarily due to the sale of predominantly higher yielding equity assets to ACE III in the fourth quarter of 2014;
for the year ended December 31, 2015, we recorded $20 million of dividend income for non-recurring dividends on equity investments compared to $34 million for the year ended December 31, 2014, resulting in a $14 million year-over-year net negative impact; partially offset by
for the year ended December 31, 2015, we recorded dividend income for the reversal of reserves of accrued PIK dividend income attributable to prior periods from preferred stock investments of $15 million; however, for the year ended December 31, 2014, we recorded reserves on accrued PIK dividend income recorded in prior periods from preferred equity investments of $2 million resulting in a $17 million year-over-year net positive impact.
As a result, the monthly weighted average effective dividend yield on equity investments was 5.6% for the year ended December 31, 2015, a 160 basis point increase over the comparable period in 2014.
Dividend income from equity investments, excluding ACAM, increased by $27 million, or 75%, for the year ended December 31, 2014 over the comparable period in 2013, due to the following:
for the year ended December 31, 2014, we recorded reserves on accrued PIK dividend income recorded in prior periods from preferred equity investments of $2 million; however, for the year ended December 31, 2013, we recorded reserves on accrued PIK dividend income recorded in prior periods from preferred equity investments of $46 million resulting in a $44 million year-over-year net positive impact;
for the year ended December 31, 2014, we recorded $34 million of dividend income for non-recurring dividends on equity investments compared to $16 million for the year ended December 31, 2013, resulting in a $18 million year-over-year net positive impact; partially offset by
a decrease of $468 million in weighted average equity investments at cost as of December 31, 2014 compared to December 31, 2013.
As a result, the monthly weighted average effective dividend yield on equity investments was 4.0% for the year ended December 31, 2014, a 220 basis point increase over the comparable period in 2013.
When a preferred equity investment is placed on non-accrual, we may record net reserves on uncollected accrued dividend income recorded in prior periods as a reduction of dividend income in the current period. Conversely, when a preferred equity investment is removed from non-accrual, we may record dividend income in the current period for prior period uncollected accrued dividend income which was reserved in prior periods.
Equity Investments - ACAM
Dividend income from ACAM increased by $43 million, or 52%, for the year ended December 31, 2015 over the comparable period in 2014, primarily due to $26 million of incentive fees received from ACE I and ACE III, as well as an increase in the funds under management of ACAM, primarily ACE III, ACAS CLO 2014-1, ACAS CLO 2014-2, ACAS CLO 2015-1 and ACAS CLO 2015-2.
Dividend income from ACAM decreased by $23 million, or 22%, for the year ended December 31, 2014 over the comparable period in 2013, primarily due to a decrease in fees earned for the management of AGNC and MTGE due to a decline in their equity as a result of repurchases of common stock and realized losses as well as increased costs associated with fund development activities. This was partially offset by an increase in the funds under management of ACAM, primarily ACSF, ACAS CLO 2013-1, ACAS CLO 2013-2, ACAS CLO 2014-1 and ACAS CLO 2014-2.
For the years ended December 31, 2015, 2014 and 2013, we received an additional $13 million, $11 million and $6 million, respectively, of dividends from ACAM, which were recorded as a reduction to the cost basis of our investment in ACAM.
Fee Income
Portfolio Company Advisory and Administrative Fees
As a BDC, we are required by law to make significant managerial assistance available to most of our portfolio companies. This generally includes providing guidance and counsel concerning the management, operations and business objectives and policies of the portfolio company to its management and board of directors, including participating on the company’s board of directors. Our portfolio company advisory and administrative fees for the years ended December 31, 2015, 2014 and 2013 were

40


$14 million, $10 million and $17 million, respectively. Our portfolio company advisory and administrative fees increased by $4 million, or 40%, for the year ended December 31, 2015 over the comparable period in 2014, primarily due to an increase in Sponsor Finance originations. Our portfolio company advisory and administrative fees decreased by $7 million, or 41%, for the year ended December 31, 2014 over the comparable period in 2013, primarily due to a decrease in the number of our operating portfolio companies.
Advisory and Administrative Services - ACAM
We have entered into service agreements with ACAM to provide additional asset management and administrative service support so that ACAM can fulfill its responsibilities under its management agreements. The fees generated from these service agreements for the years ended December 31, 2015, 2014 and 2013 were $26 million, $27 million and $26 million, respectively.
Other Fees
Other fees are primarily composed of transaction fees for structuring, financing and executing portfolio transactions, which may not be recurring in nature. These fees amounted to $24 million, $21 million and $21 million, for the years ended December 31, 2015, 2014 and 2013, respectively.
Operating Expenses
Operating expenses increased by $5 million, or 2%, for the year ended December 31, 2015 over the comparable period in 2014 and increased by $33 million, or 13%, for the year ended December 31, 2014 over the comparable period in 2013. Operating expenses consisted of the following (in millions):
 
2015
 
2014
 
2013
Interest
$
79

 
$
54

 
$
44

Salaries, benefits and stock-based compensation
125

 
149

 
156

Severance related costs
12

 
19

 

European Capital management fees
13

 
5

 

General and administrative
64

 
61

 
55

Total operating expenses
$
293

 
$
288

 
$
255

Interest
Interest expense increased by $25 million, or 46%, for the year ended December 31, 2015, over the comparable period in 2014, primarily due to an increase in the daily weighted average debt balance partially offset by a decrease in the weighted average interest rate on our borrowings. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the years ended December 31, 2015 and 2014 was 3.7% and 4.9%, respectively. The weighted average interest rate on all of our borrowings, excluding amortization of deferred financing costs, for the years ended December 31, 2015 and 2014 was 3.2% and 4.3%, respectively.
Interest expense increased by $10 million, or 23%, for the year ended December 31, 2014, over the comparable period in 2013, primarily due to an increase in the daily weighted average debt balance, partially offset by a decrease in the weighted average interest rate on our borrowings. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the years ended December 31, 2014 and 2013 was 4.9% and 6.4%, respectively. The weighted average interest rate on all of our borrowings, excluding amortization of deferred financing costs, for the years ended December 31, 2014 and 2013 was 4.3% and 5.3%, respectively.
As discussed in Note 2 to these consolidated financial statements, we consolidated our investment in European Capital effective October 1, 2014. For the year ended December 31, 2015, we recorded $5 million of interest expense related to European Capital’s debt. For the quarter ended December 31, 2014, we recorded $1 million of interest expense related to European Capital’s debt.

41


Salaries, Benefits and Stock-based Compensation and Severance Related Costs
Salaries, benefits and stock-based compensation consisted of the following (in millions):
 
2015
 
2014
 
2013
Base salaries
$
47

 
$
57

 
$
61

Incentive compensation
45

 
43

 
52

Benefits
12

 
12

 
12

Stock-based compensation
21

 
37

 
31

Severance related costs
12

 
19

 

Total salaries, benefits and stock-based compensation and severance related costs
$
137

 
$
168

 
$
156

Salaries, benefits and stock-based compensation for the year ended December 31, 2015 decreased $31 million, or 18%, from the comparable period in 2014, primarily due to a reduction in base salaries and stock-based compensation due to the workforce reductions in the fourth quarter of 2014. Salaries, benefits and stock-based compensation for the year ended December 31, 2014 increased $12 million, or 8%, from the comparable period in 2013, primarily due to (i) $5 million of stock-based compensation expense due to the acceleration of vesting on outstanding stock options for certain employees in conjunction with the ACE III transaction, (ii) $11 million of stock-based compensation expense due to the acceleration of stock options associated with the workforce reduction and (iii) $8 million in severance costs associated with the workforce reduction.
Due to changes in the composition of our investment portfolio and market conditions, we conducted strategic reviews of our business in the fourth quarter of 2014, which resulted in a workforce reduction of approximately 13% of our employees and the closing of one of our offices as well as the elimination of certain functions at other offices. In conjunction with these actions, the vesting of any unvested stock options held by impacted employees as of the date of their separation was accelerated, and they were given a period of up to one year from their separation date, or less if the expiration of the option was within one year from their separation date, to exercise all outstanding options. During the year ended December 31, 2015, we recorded charges for severance and related employee costs of $12 million, including $4 million from the modification of stock options and $8 million for severance costs for additional workforce reductions during 2015. During the year ended December 31, 2014, we recorded charges for severance and related employee costs of $19 million, including $11 million from the modification of stock options and $8 million for severance costs for additional workforce reductions during 2014.
As of December 31, 2015, we employed 346 full-time employees, which included 124 employees at ACAM, compared to 366 and 394 full-time employees as of December 31, 2014 and 2013, respectively. Compensation expense for ACAM employees is not included in our consolidated expenses as the financial results of ACAM are not consolidated with our financial results.
No stock options were granted during the year ended December 31, 2015. In 2014, we granted 0.1 million stock options with a weighted average fair value of $6.89 per option, or $1 million, and in 2013, we granted 3.7 million stock options with a weighted average fair value of $5.88 per option, or $22 million. See Note 5 and Note 6 to our audited consolidated financial statements included in this Annual Report on Form 10-K for further discussion on stock-based compensation.
European Capital Management Fees
Management fees represent fees charged by European Capital Asset Management Limited, a wholly-owned subsidiary of ACAM, to European Capital for management and other services during the year. These fees are recorded as operating revenue in ACAM’s statement of operations and are a component of the dividend income we receive from ACAM.
General and administrative
General and administrative expenses increased by $3 million, or 5%, for the year ended December 31, 2015, over the comparable period in 2014, primarily due to transaction costs associated with our strategic review process. General and administrative expenses increased by $6 million, or 11%, for the year ended December 31, 2014, over the comparable period in 2013, primarily due to charges of approximately $5 million recorded during the fourth quarter of 2014 related to subleasing excess office facilities during the quarter.

42


Tax Provision
Our tax provision consisted of the following (in millions):
 
2015
 
2014
 
2013
Tax provision - net operating income
$
(125
)
 
$
(66
)
 
$
(76
)
Tax benefit (provision) - net realized (loss) gain
91

 
(53
)
 
60

Tax (provision) benefit - net unrealized appreciation
(118
)
 
55

 
(37
)
Total tax provision
$
(152
)
 
$
(64
)
 
$
(53
)
The tax provision - net operating income for the year ended December 31, 2015 increased by $59 million from the comparable period in 2014 primarily due to an increase in net operating income. The tax provision - net operating income for the year ended December 31, 2014 decreased by $10 million from the comparable period in 2013 primarily due to a decrease in net operating income.
The tax benefit (provision) - net realized (loss) gain for the year ended December 31, 2015 increased by $144 million from the comparable period in 2014 primarily due to a decrease in the amount of realizations that resulted in losses realized for tax purposes. Losses treated as ordinary for tax purposes have an effective tax rate of approximately 39%. The tax benefit (provision) - net realized (loss) gain for the year ended December 31, 2014 decreased by $113 million from the comparable period in 2013 primarily due to an increase in the amount of realizations that resulted in losses realized for tax purposes. Realized gains and losses that result in capital gains or losses for tax purposes have an effective tax rate of 0% due to our valuation allowance against capital losses and generally do not result in a tax benefit or provision.
The tax (provision) benefit - net unrealized appreciation for the year ended December 31, 2015 decreased by $173 million from the comparable period in 2014 primarily due to an increase to the valuation allowance associated with unrealized losses on certain capital deferred tax assets in addition to the establishment of a valuation allowance against a significant portion of our ordinary deferred tax asset related to our investment in European Capital. The tax (provision) benefit - net unrealized appreciation for the year ended December 31, 2014 increased by $92 million from the comparable period in 2013 primarily due to a decrease in the valuation allowance related to the consolidation of our investment in European Capital in the fourth quarter of 2014.

43


Net Realized (Loss) Gain
Our net realized (loss) gain consisted of the following individual portfolio company realized gains (losses) greater than $15 million (in millions):
 
2015
 
2014
 
2013
Orchard Brands Corporation
$
37

 
$

 
$
16

FB Raphael 1 Limited (“Farrow & Ball”) (European Capital portfolio company)

 
213

 

Sale to American Capital Equity III, LP

 
107

 

Unwired Holdings, Inc.

 
53

 

Specialty Brands Holdings, Inc.

 
35

 

SPL Acquisition Corp.
2

 
33

 

Anchor Drilling Fluids USA, Inc.

 
21

 

DelStar, Inc.
1

 

 
44

Mirion Technologies, Inc.

 

 
27

Other, net
37

 
12

 
30

Total gross realized portfolio gain
77

 
474

 
117

 
 
 
 
 
 
WRH, Inc.
(225
)
 

 

CML Pharmaceuticals, LLC
(168
)
 

 

Sale of Senior Floating Rate Loans securities
(63
)
 

 

Dyno Holding Corp.
(62
)
 

 

Core Financial Holdings, LLC
(44
)
 

 

Miles 33 Limited
(31
)
 

 

Financière H S.A.S.
(30
)
 

 

Fosbel Holding, Inc.
(29
)
 

 

TestAmerica Environmental Services, LLC
(28
)
 

 

Contour Semiconductor, Inc.
(18
)
 

 

Hilding Anders AB
(16
)
 

 

CH Holding Corp.

 
(50
)
 

FL Acquisitions Holdings, Inc.

 
(33
)
 

Egenera, Inc.

 
(28
)
 

Neways Holdings, L.P.

 
(16
)
 

FPI Holding Corporation

 
(15
)
 
(13
)
Rebellion Media Group Corp.

 
(15
)
 

Fosbel Global Services (LUXCO) S.C.A.

 

 
(40
)
Paradigm Precision Holdings, LLC

 

 
(30
)
Wachovia Bank Commercial Mortgage Trust, Series 2007-C34

 

 
(27
)
LB-UBS Commercial Mortgage Trust, Series 2007-C6