Specialty Finance – Update October 6, 2010

John Hecht American Capital, Ltd. (1)

jhecht@jmpsecurities.com
(415) 835-3912 Initiating Coverage with a Market Outperform Rating and a $7.50 Price Target

MARKET OUTPERFORM ACAS $5.89

Price $5.89 FY: Dec 2010E 2011E 2012E
Target Price $7.50 Interest Income (M) 1Q $164.0A $140.0 $143.0
52-Wk Range $2.39 - $6.45 2Q $151.0A $139.0 $151.0
Shares Out. (M) 340 3Q $148.0 $139.0 $158.0
Market Cap. (M) $2,002.6 4Q $145.0 $139.0 $165.0
Average Daily Vol. (000) 2,051 FY $608.0 $558.0 $617.0
Float (M) 337.8
Secular Growth Rate 15% 2010E 2011E 2012E
ROE 9.0%E Operating EPS 1Q $0.17A $0.17 $0.20
2Q $0.14A $0.18 $0.22
Total Debt (M) $2,900.0 3Q $0.16 $0.18 $0.23
Debt/Equity 0.9x 4Q $0.17 $0.19 $0.24
Book Value/Share $9.15 FY $0.64 $0.72 $0.89
Price/Book Value 0.64x P/E 9.2x 8.2x 6.6x
Dividend/Yield $0/0% Previous FY NE NE NE
CY $0.64 $0.72 $0.89
P/E 9.2x 8.2x 6.6x
NC indicates no change to previous estimate. NE indicates no previous estimate. Source: Company reports and JMP Securities

INVESTMENT HIGHLIGHTS

• We are initiating coverage of American Capital, Ltd. (ACAS) with a Market Outperform rating
and a $7.50 12-month price target. ACAS is a publicly traded, internally managed business
development company (BDC) that primarily invests senior debt, subordinated debt, and equity
components of middle-market companies, with the intent of earning attractive returns for
shareholders in the form of both net investment income and capital gains. Given that ACAS has
worked through its liquidity issues, we believe that investors will now steer their focus towards
credit stability and potential NAV recovery, which we expect to be followed by a dividend recovery.
• Credit recovery is key, and we believe a credit recovery is under way. As detailed in this
initiation, we are observing trends – including lower non-accrual assets and improving portfolio level
credit metrics – that suggest that ACAS is undergoing a credit recovery. We believe this will (i) enable
ACAS to recover investment depreciation, which will fuel NAV expansion, and (ii) allow ACAS to
redeploy capital into income-generating investments, which will aid earnings growth over time.
• NAV recovery to be followed by dividend recovery; we expect ACAS to converge towards
peer multiples along the way. As we detail in this note, we are observing trends that suggest that
ACAS’ credit pipeline is stabilizing and improving. As a result, we believe there may be substantial
upside to NAV, in part due to recovery of unrealized depreciation and in part due to retained
earnings as ACAS works through its capital loss carry forward. We believe there is potentially
$2.00 of NAV upside, driven by recovery on unrealized depreciation and $1.50 to $2.00 NAV
upside, driven by earnings retention associated with the capital loss carry forward, for a total of
$3.50 to $4.00 upside. In all, we calculate a >40% potential upside to NAV. Further, according to
our earnings potential assessment, we believe that, over the next few years, ACAS has the
capacity to pay a dividend equating to a 15%+ annual yield on the current price.
• We are initiating operating EPS estimates of $0.64 in CY10, $0.72 in CY11, and $0.89 in
CY12. We expect the company to return to dividend distributions in 2Q12, and our estimates are
modestly ahead of consensus estimates for all periods.
• Valuation. Our $7.50 price target is based upon a few factors. First, it equates to approximately
75% of expected NAV in mid-CY11. This value is similar to BDCs that have worked through
liquidity issues recently and/or BDCs that pay a lower-than-peer dividend yield. In addition, our
$7.50 price target would equate to a dividend yield of 11% assuming that ACAS achieves our
potential EPS target, equating to a 15% discount to the peer group.

FOR DISCLOSURE AND FOOTNOTE INFORMATION, REFER

TO THE JMP FACTS AND DISCLOSURES SECTION
 VALUATION

We assess BDC valuations from a price to net asset value (NAV), price to investment income (P/E), and
dividend yield perspective.

ACAS trades at a price to book (or net asset value, NAV) multiple of 0.64x and a price to estimated
2010 operating income multiple of 9.2x (the company does not currently pay a dividend, and therefore
we cannot evaluate it in a yield basis). By comparison, the broad peer group trades at the following
average multiples: 1.1x price-to-book, 11.2x price to 2010 operating earnings, and 10.4% dividend yield.
The broad peer group includes BDCs of various sizes with a variety of investment focuses, including
debt financing for mid-market businesses and equity investments and/or providers of growth capital.

Where there may be similarities drawn between the comparable peer group in the manner of
investments made by these companies and their respective corporate structure, we believe ACAS is
unique in the sense that it is a NAV stabilization/recovery story for the next several quarters following its
recent debt restructuring, and we expect that a dividend yield-based valuation is 1-2 years off.

ACAS' current NAV is $9.15, and we estimate NAV in mid-CY11 to be $9.84 as the company is currently
retaining earnings and has been experiencing unrealized appreciation over the past few quarters. Further,
as we highlight in this note, we believe there is approximately $2 of potential recoverable NAV and that
ACAS' potential core EPS is $0.80 to $0.88, suggesting the company could pay out an annualized
dividend of approximately $0.85 once the company has "earned" and offset its capital loss carry forward.

Our $7.50 price target accounts for a few factors. First, it equates to approximately 75% of expected
NAV in mid-CY11 (which excludes the potential recovery of unrealized depreciation). This would be
similar to KCAP’s (Kohlberg Capital, KCAP, Market Perform) current valuation, a comparison made
relevant in that KCAP recently improved its liquidity position as well. In addition, this compares to
MVC’s (MVC Capital, MVC, Market Outperform, $15 PT, discount to NAV) current valuation, a
comparison made relevant in that MVC distributes a lower-than-peer dividend and in that MVC has a
higher-than-peer percentage of equity investments, similar to ACAS. Finally, our $7.50 price target
would equate to a dividend yield of 11% assuming that ACAS achieves our potential EPS target,
equating to a 15% discount to the peer group.

FIGURE 1: Peer Comparison

10/5/10 Price Market Operating Income/Share BV/ Dividend/ Dividend/
Company Ticker Price Rating Target Cap 2010E 2011E Share Share Yield
Apollo Investment Corp. AINV $10.44 N/R -- $1,977 $1.02 $1.11 $9.51 $1.12 12.00%
Ares Capital Corp. ARCC $15.64 MO $18.00 $3,025 $1.28 $1.58 $14.11 $1.40 8.95%
BlackRock Kelso Capital Corp. BKCC $11.87 N/R -- $766 $1.14 $1.25 $9.83 $1.12 11.35%
Fifth Street Finance Corp. FSC $11.25 N/R -- $599 $1.50 $1.18 $10.43 $1.14 10.34%
Main Street Capital Corp. MAIN $16.33 N/R -- $291 $1.09 $1.26 $12.21 $1.52 10.18%
Hercules Technology Growth Capital Inc. HTGC $10.29 MO $12.00 $468 $0.85 $1.24 9.80 $1.01 9.82%
Kohlberg Capital Corp. KCAP $6.75 MP -- $152 $0.46 $0.64 9.20 $0.68 10.07%
MVC Capital Inc. MVC $13.06 MO $15.00 $308 $0.34 $0.39 17.35 $0.48 3.68%
PennantPark Investment Corp. PNNT $10.82 MO $12.00 $335 $1.09 $1.13 $10.94 $1.06 9.80%
Prospect Capital Corp. PSEC $9.80 N/R -- $756 $1.11 $1.14 $10.29 $1.33 13.78%
TICC Capital Corp. TICC $10.40 N/R -- $269 $0.89 $0.97 $9.03 $0.65 7.74%
Triangle Capital Corp. TCAP $16.01 MP -- $231 $1.51 $1.71 $11.08 $1.64 10.24%
American Capital Ltd. ACAS $5.89 MO $7.50 $1,929 $0.64 $0.72 $9.15 $0.00 0.00%
\
10/5/10 Market PE Multiples Price/ Dividend/ Dividend
Company Ticker Price Cap 2010E 2011E Book Share Yield
Apollo Investment Corp. AINV $10.44 N/R -- $1,977 10.2x 9.4x 1.10x $1.12 12.00%
Ares Capital Corp. ARCC $15.64 MO $18.00 $3,025 12.2x 9.9x 1.11x $1.40 8.95%
BlackRock Kelso Capital Corp. BKCC $11.87 N/R -- $766 10.4x 9.5x 1.21x $1.12 11.35%
Fifth Street Finance Corp. FSC $11.25 N/R -- $599 7.5x 9.6x 1.08x $1.14 10.34%
Main Street Capital Corp. MAIN $16.33 N/R -- $291 15.0x 12.9x 1.34x $1.52 10.18%
Hercules Technology Growth Capital Inc. HTGC $10.29 MO $12.00 $468 12.1x 8.3x 1.05x $1.01 9.82%
Kohlberg Capital Corp. KCAP $6.75 MP -- $152 14.7x 10.5x 0.73x $0.68 10.07%
MVC Capital Inc. MVC $13.06 MO $15.00 $308 38.4x NM 0.75x $0.48 3.68%
PennantPark Investment Corp. PNNT $10.82 MO $12.00 $335 9.9x 9.6x 0.99x $1.06 9.80%
Prospect Capital Corp. PSEC $9.80 N/R -- $756 8.8x 8.6x 0.95x $1.33 13.78%
TICC Capital Corp. TICC $10.40 N/R -- $269 11.8x 10.8x 1.15x $0.65 7.74%
Triangle Capital Corp. TCAP $16.01 MP -- $231 10.6x 9.4x 1.44x $1.64 10.24%

Mean MEAN 11.2x 9.9x 1.1x $1.15 10.39%

Median MEDIAN 10.6x 9.6x 1.1x $1.12 10.18%

American Capital Ltd. ACAS $5.89 MO $7.50 $1,929 9.2x 8.2x 0.64x $ - 0.00%
Source: FactSet and JMP Securities

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FIGURE 2: ACAS One-Year Price Chart

Source: FactSet Research Systems

A NAV RECOVERY STORY, AND WE EXPECT THE P/NAV TO CONVERGE

TOWARDS THE PEER GROUP OVER TIME

We are hopeful for a NAV recovery followed by a dividend recovery.

Given that ACAS has worked through its liquidity issues, we believe that investors will now steer their
focus towards credit stability and potential NAV recovery. As we detail in this note, we are observing
trends that suggest that overall credit conditions are stabilizing/improving while our analysis suggests
that ACAS' credit pipeline is stabilizing and potentially improving as well. According to our analysis,
ACAS could recover approximately $2 of NAV per share through unrealized appreciation if an economic
recovery is, in fact, underway. Further, as highlighted later in this report, we believe that ACAS will
have ~$600 mm of capital loss carry forwards to shield income, allowing for $1.50-$2.00 per share of
NAV retention.

In addition, we anticipate ACAS repaying an additional $310 mm in constricting debt by year end,
which, in our opinion, will reduce covenant restrictions to a point where ACAS can begin to refocus on
its core business of engaging in buyouts and assisting with buyout financing (the latter of which will be
ACAS' focus going forward. The repayment of debt by the end of CY10 would reduce the amortizing
debt to less than $422 mm and would provide ACAS: (i) with the ability to retain 75% of excess cash
flow for redeployment, (ii) reduced leverage to a point that leaves ACAS well within debt covenant
guidelines, and (iii) a reduction in interest rates on the floating rate and fixed rate secured debt by 100
bps. ACAS has a great deal of experience in buyouts and buyout-financing, and we anticipate this
market becoming increasingly active over the next few quarters. Additionally, we believe the market
has lost some supply-side capacity as a result of the recession and that the competitive environment is
more rational as a result, a factor that we believe will favor long-term participants in the market.

In the end, we believe an investment in ACAS initially represents an opportunity to buy a stock at an
attractive price relative to its current NAV, where credit conditions are stabilizing and where recovery of
losses and unrealized depreciation is likely to take place. Beyond this, we anticipate that ACAS will
begin distributing a dividend, offering an attractive enhancement to potential investment returns over
time. Over this time horizon, we anticipate that ACAS’ discount to its peer group will contract.

Credit recovery is key, and we believe a credit recovery is under way.

We are observing trends – including lower non-accrual assets and improving portfolio level credit
metrics – that suggest that ACAS is undergoing a credit recovery. We believe this will (i) enable ACAS
to recover investment depreciation, which will fuel NAV expansion, and (ii) allow ACAS to redeploy
capital into income-generating investments, which will aid earnings growth over time.
As we detail in the section “ACAS Credit Performance Review”, we highlight three factors that give us
improving comfort with respect to ACAS credit performance. First, we believe that, through fair market
valuation, ACAS has economically accounted for its credit risk. We review the CMBS and CLO
portfolios in detail in this report, and we conclude there to be some upside in other areas of ACAS’
investment portfolio based on the current valuation of its assets. Second, we note that ACAS non-
accrual loans are 5% lower than they were in 2Q09 and that ACAS has incurred unrealized appreciation
over the past four quarters, suggesting that ACAS may be benefiting from an economic recovery.
Finally, we note that portfolio level credit metrics are improving, which leads us to believe that ACAS
may incur further unrealized appreciation (or recovery of depreciation) and that in-flows to non-accruals
will slow. Figure 3 highlights these trends.

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FIGURE 3: ACAS Credit Quality Metrics Imply Stabilization in Our View

1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A
Mean Net Debt to Valuation EBITDA N/A N/A N/A 4.0 4.2 4.4 4.6 4.5 4.3 4.3
Total Net Debt to Valuation EBITDA N/A N/A N/A 5.1 5.3 6.5 5.9 5.8 5.5 5.5
Debt to EBITDA 5.9 6.0 6.0 5.9 5.8 6.0 6.3 6.0 5.9 5.9
Interest Coverage 1.9 1.8 1.9 2.0 2.0 2.1 2.0 2.2 2.2 2.3
Debt Service Coverage 1.6 1.8 0.6 1.7 1.7 1.7 1.7 1.8 1.8 1.8

Source: Company reports and JMP Securities

NAV history and potential upside to NAV:

As Figure 4 shows, during the recession, ACAS' NAV contracted nearly 75% due to accumulated
unrealized losses and charge-offs (realized losses). The company’s price-to-NAV also declined
materially during this period: the average P/NAV has been 1.3x since its IPO and the 2Q10 P/NAV was
0.5x. Further, as we detail in this report, we believe that current book value per share of $9.15 has
approximately $2 per share of potential upside, driven by a recovery of a portion of unrealized losses
(see Figure 12). In our assessment, we believe there is $681 mm of total recoverable value, much of
which is tied to European Capital (ECAS, as discussed later in this report); however, we note that a
meaningful portion is related to accruing loans that have been marked down due to FAS 157 and that
should pay off at par upon maturity. We also expect the company to be able to retain $1.50-$2.00 per
share in earnings through the utilization of its capital loss carry forward.

FIGURE 4: ACAS BVPS and Price/Book History

ACAS BVPS and Price/BVPS since 2007

$40.00 2.0x

$35.00 1.8x
1.6x
Book Value Per Share

$30.00
1.4x
$25.00

Price/BVPS
1.2x
$20.00 1.0x

$15.00 0.8x
0.6x
$10.00
0.4x
$5.00 0.2x
$0.00 0.0x
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

ACAS NAV (Left Axis) Price to Book Value Per Share (Right Axis)

Source: Company reports and JMP Securities

More rational competition and the re-emergence of private equity over time will benefit
incumbent operators:
We believe that the recession significantly diminished suppliers of credit to the middle markets, and, as
a result, we believe that the competitive framework is improved from the 2004-2007 period. Because of
the more rational competitive environment, we believe that risk-adjusted returns are enhanced as
leverage is lower, spreads are modestly wider, and lending terms are a bit tighter. Further, we believe
that hedge funds and other alternative asset classes have reduced capacity to lend to the middle
markets. In addition, a large pool of private equity raised between 2006 and 2008 (~$750 mm) will likely
require significant financing to support deals in coming years and should enhance demand for credit.
Therefore, we believe demand for credit in the middle markets is slowly returning while the playing field
is more rational. We do not expect ACAS be an active lender in this market until it has repaid ~$310
mm of debt as a result of the recent exchange, at which point the restrictive covenants will be eased.
We expect that ACAS will be able to pay down this restricting debt with realizations and excess cash
from operations in the coming quarters, allowing the company to focus more on its core business of
middle market buyout financing.

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OTHER INVESTMENT HIGHLIGHTS

We believe there is material upside to NAV from both retained earnings and from the recovery of
unrealized depreciation. As we detail in this initiation report, we believe ACAS has two sources to fuel
NAV expansion over the next several quarters: retained earnings, as ACAS utilizes its net capital loss
carry forward, and the recovery of unrealized depreciation. In our assessment, ACAS will have ~$600
mm, or $1.50 to $1.75 per share, of capital loss carry forward as the company realizes further losses.
This capital loss carry forward shields income, allowing ACAS to retain earnings rather than distribute
them, in order to grow its NAV. In addition, according to our analysis, it is possible that ACAS could
recognize nearly $2 per share of recovery of unrealized depreciation driven in part by the economic
recovery and in part by loan payoffs at par on assets that have a fair value below par. Combined, we
calculate that there is $3.50 to $4.00 of potential upside to NAV, which equates to an appealing >40%
upside.

Core EPS potential reflects strong dividend potential. According to our forecast, ACAS’
intermediate to late-term quarterly earnings capacity is between $0.18 and $0.20 per share. In addition,
we believe there is approximately 10% upside to this earnings capacity in the intermediate term given
ACAS’ strategy to redeploy capital into higher yielding assets and to reduce debt levels in order to
reduce the average cost of funds. Therefore, while we do not anticipate a dividend payment until late
CY11 or CY12, we highlight that the potential dividend of approximately $0.85 per share reflects an
annual return of 15% on the current stock price.

Reformatted business focus and restructured balance sheet result in a more stable investment
opportunity. In our opinion, two primary factors accounted for the incremental financial weakness that
ACAS experienced during the downturn: higher-than-peer leverage and a higher-than-peer composition
of equity investments. Before 2009, ACAS consistently operated with leverage (debt to equity) ratios
above 0.7x (versus the peer group, which averaged ~0.6x) providing the company little flexibility to
navigate through challenging periods. In addition, ACAS’ portfolio was comprised of 40% equity assets
by the end of 2007. The combination of relatively high leverage and high exposure to equity assets
(which provide no cash return and typically contract in value before other types of securities during a
financially challenging period) resulted in liquidity stress and impaired cash earnings during the
downturn. Going forward, ACAS has expressed its intention to operate at 0.6x leverage and to invest in
a "substantially higher" proportion of debt versus equity investments in order to de-risk the asset mix.
Further, as a result of the debt restructuring, ACAS has limited near-term maturities and is focused on
paying down additional debt. We believe the current business strategy will result in a more defensive
balance sheet and lower risk going forward.

Attractive value: As noted, ACAS currently trades at 0.64x book value in comparison to 1.1x for the
peer group. This discount to book is even more pronounced should ACAS recover some or all of the $2
per share in potential upside from asset recoveries, according to our analysis, and/or should ACAS be
able to retain income by utilizing its capital loss carry forward. Further, according to our analysis of core
earnings potential, ACAS could pay an annual dividend equating to a 15% yield on the current price
once it has utilized its capital loss carry forward.

INVESTMENT RISKS

Credit: We view credit as the most significant risk for all unsecured lenders. While we believe ACAS
has an excellent credit culture, the company is making subordinate, unsecured investments in lower
middle-market companies. Further, ACAS has significant exposure to structured credit assets including
CDOs, CLOs, and CMBS. This type of lending entails a meaningful level of credit risk.

Capital markets dependence: As a consequence of its mandated leverage constraint and dividend
payout, ACAS is periodically dependent on the equity markets for growth capital. If the capital markets
are not open to ACAS or capital is not available at attractive terms, ACAS’ growth could be curtailed.

Recessionary economic environments: Periods of economic weakness, recession, and/or downturn

could have adverse effects on the operations of ACAS’ portfolio companies, which could impact ACAS’
operating performance.

Portfolio composition/concentration: RIC rules require that at least 70% of the value of a BDC's total
assets must be comprised of investments in eligible portfolio companies and/or cash and cash
equivalents, where eligible portfolio companies are generally defined as U.S.-based privately held or
thinly traded public companies. So, while opportunistic investments in distressed debt or equity of

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public companies, investments in high yield bonds, debt and equity securities in CLO funds, and
international investments are permissible, these may not exceed 30% of the value of a BDC's total
assets. Failure to comply could result in fines and the loss of the BDC/RIC tax treatment.

Competition: We believe ACAS operates in a relatively competitive niche of the middle market and is
therefore subject to forces of competition.

Restrictive debt covenants: As a result of ACAS' recent debt restructuring, the company is operating
under certain restrictions that limit its ability to engage in certain activities. Until these restrictions are
removed, ACAS may have certain competitive disadvantages.

Mark-to-market requirement: As an RIC, ACAS is required to mark its investments to "fair value" on a
quarterly basis and recognize the net change in valuation through earnings as an unrealized gain or
loss. In our view, this is, at best, an inherently imprecise exercise, as most of ACAS’ investments are in
private, middle-market companies for which there exist no directly or indirectly observable inputs.

COMPANY OVERVIEW

American Capital Ltd. (ACAS) primarily invests senior debt, subordinated debt, and equity in the
buyouts of private companies and also directly invests in the debt and equity components of middle-
market companies with the intent of earning attractive returns for shareholders in the form of both net
investment income and capital gains. Additionally, ACAS historically invested in structured financial
products including CLO securities, CDO securities, and CMBS. ACAS' investment focus is on middle-
market organizations, defined as companies with enterprise values between $20 mm and $500 mm and
EBITDA greater than $4 mm, and ACAS has traditionally focused on manufacturing, services, and
distribution companies. Additionally, ACAS has an investment in European Capital, a wholly owned
investment fund that invests in debt and equity of middle-market companies located in Europe, and
ACAS is also an alternative asset manager with ~$9 BB of third-party capital under management across
four private and public funds.

Structurally, ACAS is an internally managed, non-diversified, closed-end investment company that is

regulated as a business development company (BDC) and operates as a regulated investment
company (RIC) for tax purposes.

ACAS completed its initial public offering (IPO) in 1997. Since inception, ACAS has invested over $31
BB in 522 portfolio companies As of 6/30/10, ACAS’ investment portfolio consisted of over 235
companies across 25 industries at a total investment (at fair value) of $5.7 BB. As of 6/30/10, total
assets stood at $6.2 BB, and net asset value (NAV) was $9.15 per share.

RESTRUCTURING, DEBT EXCHANGE, AND LIQUIDITY OVERVIEW

Restructuring Summary
ACAS’ investment portfolio experienced credit quality issues and diminished in value during the
recession, causing ACAS to breach certain debt covenants. In order to cure the restrictive issues
associated with its default, ACAS entered into an exchange of its debt on 5/3/10 and completed the
restructuring on 6/28/10. In the restructuring, ACAS exchanged $2.3 BB of unsecured debt with $1.3
BB of new secured debt maturing in Dec. 2013 and paid down $1 BB of debt with cash. $528 mm of
the new $1.3 BB in debt is non-amortizing debt due in August 2013, while $779 mm of the new debt is
amortizing debt. ACAS paid a 2% closing fee on the $1.3 BB of new secured debt, and there is an
additional 1% fee on the remaining outstanding balance as of 12/31/11 and 12/31/12. $281 mm of the
new debt is floating rate at L+650 bps with a 2% LIBOR floor with the rate being reduced 100 bps if
ACAS has less than $1 BB in secured debt outstanding. The remainder is fixed rate debt that costs
8.96%, which also will be reduced by 100 bps if ACAS has less than $1 BB in debt outstanding. In
addition, covenants under the new debt restrict ACAS' ability to reinvest excess cash flows and require
the company to pay down debt with a portion of proceeds from capital raises.

As a result of the exchange, ACAS is somewhat constrained in its capital deployment but, overall, has
the ability to improve operational flexibility as it pays down debt. We expect the company to pay down
over $300 mm of additional debt by the end of CY10, which would reduce the amortizing debt to less
than $422 mm and which would provide ACAS numerous benefits, including: (i) the ability to retain 75%
of excess cash flow for redeployment, (ii) reducing leverage to a point that leaves ACAS well within debt
covenant guidelines, and (iii) reducing the interest rates on the floating rate and fixed rate secured debt
by 100 bps.

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Based upon our expectations for the additional debt pay down by the end of CY10, and in consideration
of our forecasts for portfolio repayment rates and portfolio liquidity events, we do not believe that the
limitations associated with ACAS' restructured debt impede its near-term strategy meaningfully (or at
all). Through discussions with management and review of company presentations, we believe it is the
company’s intent to further de-lever the organization to a range of 0.6x debt to equity, similar to other
BDCs. Our model contemplates this trend.

Lastly, the exchange pushed out the maturities of ACAS. As shown below in Figure 5, the exchange
pushed back the 2009, 2010, and 2011 maturities to 2013 with a small maturity in 2012. Therefore, the
extension of maturities should provide ACAS with some flexibility to focus on investments and rebuilding
the core business.

FIGURE 5: Effects of ACAS Exchange and Credit Facility Amendments

ACAS Debt Maturities Pre- and Post-Exchange

($mms) 12/31/2009 6/30/2010
Fixed rate private secure notes due 12/2013 $ - $ 502
Floating rate private secured notes due 12/2013 $ - $ 277
Fixed rate public secured notes due 12/2013 $ - $ 524
Floating rate public secured notes due 12/2013 $ - $ 4
Unsecured public debt due 10/2012 $ 548 $ 11
ACAS Business Loan Trust 2004-1 asset securitization $ 170 $ 160
ACAS Business Loan Trust 2005-1 asset securitization $ 696 $ 629
ACAS Business Loan Trust 2006-1 asset securitization $ 377 $ 352
ACAS Business Loan Trust 2007-1 asset securitization $ 294 $ 250
ACAS Business Loan Trust 2007-2 asset securitization $ 255 $ 215
Unsecured revolving credit facility $ 1,388 $ -
Unsecured private debt due 9/2009 $ 84 $ -
Unsecured private debt due 8/2010 $ 134 $ -
Unsecured private debt due 2/2011 $ 26 $ -
Unsecured private debt due 9/2011 $ 95 $ -
Unsecured private debt due 10/2020 $ 75 $ -
Total: $ 4,142 $ 2,924

Source: Company reports and JMP Securities

ACAS PORTFOLIO OVERVIEW

ACAS seeks to make investments in companies with at least $4 mm in EBITDA in LBO transactions. At
6/30/10, ACAS’ investments totaled approximately $5.7 BB (FMV) and consisted primarily of
subordinated debt, senior debt, and preferred equity. The portfolio is diversified by company, industry,
and investment structure. The portfolio is comprised of investments in over 235 companies across 25
industries (Figure 6) with the average investment per company ranging between $30 mm and $50 mm,
historically equating to ~0.5% of total assets on average. Figure 6 provides an overview of the ACAS
investment portfolio by industry as of 6/30/10. We note that no industry comprises more than 12.4% of
the portfolio and that ACAS’ average investment has represented only 0.5% of total assets. The
portfolio is also diversified geographically with 24% in the Southwest, 19.4% in the Mid-Atlantic, 15.1%
in the Northeast, 12.2% in South-Central, 11.4% internationally, 10% in the Southeast, 7.5% in North-
Central, and 0.4% in the Northwest.

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FIGURE 6: June 2010 Portfolio by Industry Concentration

Industry Diversification at Fair Value as of 6/30/10

Leisure Equipment Other

Software
2% Capital Markets 11%
2% Commercial Services
2%
12%

Construction
2%
Diversified Consimer Services Household Durables
2% 6%

Computers and Peripherals Electrical Equipment

2% 6%
Food Products
2%
Electronic Equipment Hotels, Restaurants and Leisure
3% 5%

Building Products
3%
Internet and Catalogue Retail
5%

Diversified Financial Services

IT Services
3%
Pharmaceuticals 5%
Life Science Tools 3% Healthcare Providers
3% 5%

Auto Components
Professional Services REIT Healthcare Equip Internet Software
4%
3% 3% 3% 4%

Source: Company reports

Figure 7 below provides an overview of ACAS’ investment portfolios by asset type. The portfolio is
reflective of ACAS’ historical investment balance among senior debt, subordinated debt, and equity.
The portfolio also contains legacy structured investments including investments in CMBS and CLO
securities, both of which make up a substantially higher percentage of the portfolio at cost given the
material amount of fair market value depreciation that has occurred in these securities. As of 6/30/10,
the yield on ACAS’ Private Finance Debt was 10.3%, up from 9.9% as of 12/31/09.

FIGURE 7: Portfolio Breakdown by Investment Type as of 6/30/10 at Fair Value

ACAS Investment by Security Type as of 6/30/10

Revolving Credit Facility

2% Common
Senior<L+650 6%
5%
Preferred
Senior>L+650 19%
23%

Warrants
1%
CMBS
Equity in Managed Funds
1%
7%
CLO
2%
Subordinated Debt
34%

Source: Company reports and JMP Securities

Figure 8 below provides an overview of the cost and fair value within the ACAS portfolio by investment
type. We note that structured product investments have experienced the most significant fair value
depreciation within the portfolio in terms of percentages but that control investments reflect the largest
losses on a dollar basis.

8
FIGURE 8: Cost vs. Value by Investment Type for ACAS Portfolio as of 6/30/10

Fair Market
Investment Type Cost Value Gain/(loss) % Gain/(loss)
Investments in Non-controlled, non-affiliated portfolio companies $3,764 $2,888 -$876 -23.3%
CMBS Investments $413 $30 -$383 -92.8%
CLO Investments $233 $117 -$116 -49.7%
Affiliate Investments $300 $216 -$84 -28.0%
Control Investments $3,730 $2,443 -$1,287 -34.5%
Total Portfolio $8,439 $5,694 -$2,745 -32.5%
Source: Company reports and JMP Securities

CMBS securities: Through discussions with management and based upon discussions with industry
participants, we believe that the 93% depreciation on CMBS investments is reasonable if not
conservative. We believe that many of these investments will continue to be impaired from a cash flow
perspective, and, given the overall impaired state of liquidity in the market, we do not anticipate much
upside in the current environment. That said we do not believe the CMBS securities pose a meaningful
threat to book value given what we believe to be sufficient markdown as shown in Figure 8 above.

CLO securities: Figure 9 below provides a comparison of ACAS' valuations of its CLO investments
(shown above in Figure 8 as well) versus an Intex model-based pricing of each security. We note
overall that the portfolio appears fairly valued, with the sum of the Intex modeled portfolio yielding a
cumulative value within 1% of the current fair market value of these securities as presented on ACAS’
balance sheet. We note that there could be some discrepancies in our analysis based on the
respective tranche of the security (which we do not know), and, for our Intex run, we assumed the
lowest tranche out of conservatism. In addition, we assumed the following: future defaults: 3%;
recoveries: 65%; dollar price for reinvested assets: 98; LIBOR margin for reinvested assets: 400 bps;
assumed IRR on CLO debt securities: 15%; assumed IRR on CLO equity securities: 30%. Given our
analysis, we feel that the CLO investments do not pose much risk or provide meaningful upside to
ACAS' NAV.

FIGURE 9: ACAS CLO Portfolio Valuation versus Intex

CLO Investments Asset Class Intex Generated Price ACAS Price

as of % of Cost as of % of Cost

ACAS CLO 2007-1, Ltd. Secured Notes 57.5% 51.2%

ACAS CLO 2007-1, Ltd. Subordinate Notes 57.7% 74.8%
Ares IIIR/IVR CLO Ltd. Subordinated Notes 49.6% 39.3%
Ares VIII CLO, Ltd. Preference Shares 33.8% 35.4%
Avalon Capital Ltd. 3 Preferred Securities 52.5% 92.9%
Babson CLO Ltd. 2006-II Income Notes 56.2% 73.9%
BALLYROCK CLO 2006-2 LTD. Deferrable Notes 57.7% 62.5%
Cent CDO 12 Limited Income Notes 68.5% 80.2%
Centurion CDO 8 Limited Subordinated Notes 77.4% 86.2%
Champlain CLO Preferred Securities 52.4% 57.1%
CoLTs 2005-1 Ltd. Preference Shares 9.4% 6.0%
CoLTs 2005-2 Ltd. Preference Shares 59.1% 32.0%
CREST Exeter Street Solar 2004-2 Preferred Securities 2.3% 16.7%
Eaton Vance CDO X PLC(3) Secured Subordinated Income Notes 24.6% 21.2%
Essex Park CDO Ltd. Preferred Securities 39.4% 87.0%
Flagship CLO V Deferrable Notes 62.0% 69.2%
Flagship CLO V Subordinated Notes 41.7% 59.5%
Galaxy III CLO, Ltd Subordinated Notes 17.6% 13.0%
LightPoint CLO IV, LTD Income Notes 33.9% 21.6%
LightPoint CLO VII, Ltd. Subordinated Notes 59.7% 70.6%
LightPoint CLO VIII, Ltd. Deferrable Notes 73.3% 59.1%
Mayport CLO Ltd. Income Notes 51.8% 43.7%
NYLIM Flatiron CLO 2006-1 LTD. Subordinated Securities 59.2% 75.0%
Octagon Investment Partners VII, Ltd. Preferred Securities 40.3% 83.3%
Sapphire Valley CDO I, Ltd. Subordinated Notes 29.1% 11.0%
Vitesse CLO, Ltd. Preferred Securities 56.4% 54.2%

Source: Intex, company reports, and JMP Securities

9
MANAGED FUNDS OVERVIEW

ACAS had ~$15 BB in capital resources under management as of 6/30/10, including $7.8 BB under
rd
American Capital Agency. Figure 10 below outline ACAS’ 3 party asset managers. We note that
ACAS had $5.7 BB of investments on its balance sheet as of 6/30/10 including the investment in ECAS
(which is detailed below).

FIGURE 10: ACAS Managed Funds

Source: Company reports and JMP Securities

American Capital Agency (AGNC, Market Perform): Established in 2008 and publicly listed on
Nasdaq, AGNC is a mortgage REIT that invests exclusively in agency securities and collateralized
mortgage obligations for which the principal and interest payments are guaranteed by a U.S.
government agency or a U.S. government-sponsored entity. AGNC is externally managed and advised
by American Capital Agency Management, LLC, a subsidiary of a wholly-owned portfolio company of
ACAS. As of 6/30/10, ACAS held a common member interest in AGNC equating to $50 mm at cost,
$66.1 mm at fair value, and representing 1.16% of ACAS' investments at fair value.

Private Equity Managed Funds: In 2007, ACAS initiated a strategy to reduce its own equity exposure
by raising off balance sheet private equity funds that, in turn, would purchase strips of equity from
ACAS’ investment portfolio. Through these funds, ACAS was able to monetize a portion of its equity
investments, and would redeploy the proceeds from the sale of equity securities into higher yielding
fixed income securities. In addition, ACAS received management fees of 2% of the assets in each fund
and maintained 20% of the performance-oriented upside in the funds. ACAS established ACE 1
(American Capital Equity I) in October 2006 as a $1 billion private equity fund managed by American
Capital, and this fund subsequently purchased 30% of American Capital’s equity interest in 96 portfolio
companies. ACE 2 (American Capital Equity II) was established in October 2007 as a $585 million
private equity fund managed by American Capital, which purchased 17% of American Capital’s equity
investments in 80 portfolio companies. As of 6/30/10, ACAS reflected its portion of ACE I and ACE II on
its balance sheets equating to $70.8 mm at cost, $65.9 mm at fair value, and representing 1.16% of
ACAS' investments at fair value.

European Capital (ECAS) is an investment company for pan-European equity, mezzanine, and senior
debt investments with capital resources of approximately €2.7 billion ($3.5 billion). It is managed by a
wholly-owned affiliate of ACAS. ECAS invests in private and public companies headquartered
predominantly in Europe, investing typically between €5 million and €25 million per transaction in equity,
mezzanine debt, and senior debt. ACAS has been an investor in ECAS since 2008, and, as of 6/30/10,
ACAS held subordinated debt in ECAS of $53.7 mm at cost and $53.9 mm at fair value and equity in
ECAS of $1,267.3 mm at cost and $409 mm at fair value. The current fair value of ECAS equity
represents a ~$300 mm discount to ECAS’s NAV of ~$700 mm due to public comparable companies in
Europe and restricted liquidity. Combined, the investments in ECAS represent 8.13% of the ACAS
portfolio at fair market value.

CDO/CLO Group: ACAS also employs a CDO/CLO asset manager. The group originates and
manages a portfolio of principal investments in CDOs and CLOs. As of 6/30/10, the CLO and CDO
investments were held as a portion of non-control, non-affiliate investments, and the CLO portfolio

10
reflected a total value of $117 mm versus a total cost of $233 mm; the CMBS portfolio reflected a total
value of $30 mm versus a total cost of $413 mm.

ACAS' INTERMEDIATE-TERM STRATEGY

Further delevering and risk reduction

Following the restructuring, ACAS is primarily focused on delevering further and reducing the risk on its
balance sheet. As discussed, ACAS intends to pay down secured debt by $310 mm by year end. This
would further delever the balance sheet and would reduce total leverage to less than 0.8x. Additionally,
this action would reduce the interest rates by 100 bps on the debt issued through the recent exchange,
and would provide ACAS the ability to redeploy up to 75% of its free cash flow (versus the 50% it
currently has the ability to redeploy). ACAS intends to reduce its leverage to 0.6x over time, and
intends to use on-balance securitizations in order to finance the portfolio going forward.

Redeploy capital into higher yielding fixed income securities

ACAS' portfolio entering the recession was heavily weighted with equity securities in comparison to
peers. At CYE 2007, ACAS' portfolio was composed of 54% debt, 40% equity, and 6% structured
products. In addition to delevering, we believe that ACAS is also focused on reducing the equity
composition within its portfolio in order to mitigate credit risk. Further, as ACAS liquidates equity
investments, we expect the company will redeploy the proceeds into fixed income securities, particularly
mezzanine securities, in order to boost investment income. ACAS will likely continue to invest in equity,
but at a smaller volume than debt securities and primarily in existing portfolio companies. Additionally,
we note that ACAS intends to hold certain equity investments through the economic recovery in order to
benefit from potential EBITDA growth and multiple expansion.

Raising additional managed funds to further reduce equity exposure

To further reduce the overall equity composition of the portfolio, ACAS will attempt to raise new
managed funds for private equity investments, similar to ACE 1 and ACE 2. As previously discussed,
ACAS will use these funds to monetize equity investments on its balance sheet (in order to redeploy
these into fixed income securities). ACAS receives a 2% management fee and maintains a portion of
the economic upside in the remaining equity investments.

ASSESSMENT OF CORE EARNINGS POTENTIAL

Figure 11 below highlights ACAS' core potential for the intermediate term if the aforementioned
strategies are successfully implemented. In our analysis, we include the effects of further delevering
and the impact on interest expense. We calculate ~$20 mm in interest expense savings annually if
ACAS delevers according to our calculations (targeting 0.6x leverage by mid-CY11) and benefits from a
100 bps reduction in the cost of funds. Second, we estimate that ACAS will monetize 30% of its equity
and preferred equity investments ($342 mm outstanding as of 6/30/10), reinvesting 75% of these
proceeds (per the debt covenants) into mezzanine debt. We assume a 12% yield on mezzanine
investments, which is lower than current market rates. According to our analysis, potential core EPS at
ACAS is $0.20 to $0.22 per quarter, up from $0.18-$0.20 currently. Figure 11 highlights this analysis.

FIGURE 11: ACAS Potential Core EPS Upside

ACAS Potential Core EPS

$ MM of Earnings
Augment EPS
Current Quarterly Core Earnings per Share $ 0.18-$0.20
+ Reduced interest expense (100 bps) and lower leverage $ 20
+ Sale of 30% of equity investments and 75% (debt covenants) invested into Mezz debt $ 4
+ Sale of 30% of preferred equity investments and 75% (debt covenants) invested into Mezz debt $ 10
Additions to Earnings $ 34
Est. Shares outsanding CYE 2011 340
Potential additional EPS, quarterly $0.02
Total potential core quarterly EPS $ 0.20-$0.22
Source: Company reports and JMP Securities

We note that there are significant obstacles facing ACAS that it must overcome to increase its core
EPS. Disposing of equity through asset sales or the raising of an additional equity fund could be
difficult. Further, ACAS' lowest cost debt is in its securitizations, and, as these pay down, it could result
in a rising average cost of funds. Lastly, our analysis depends upon ACAS’ ability to originate
mezzanine investments, which may not come to fruition.

11
POTENTIAL NAV RECOVERY / UPSIDE TO ACAS BOOK VALUE

In order to assess potential upside to NAV (or NAV recovery), we assume that ACAS recovers some of
its unrealized depreciation as the economy improves. Figure 12 below outlines our assumptions for
potential recoveries to NAV. As shown, we estimate that accruing debt will experience a 75% recovery
rate (meaning that ACAS will recover 75% of its fair value depreciation on this asset class), a 45%
recovery on the remaining senior loans, and a 15% recovery on subordinate loans. In addition, we
estimate that ACAS will recover 45% of its markdown on ECAS' equity, 10% of its preferred stock
markdown, and 8% on both equity and warrant markdowns. Our recovery analysis for loans is based
on recoveries we have seen in the high yield and middle-market loan markets for other BDCs, while our
equity recovery assumptions are more speculative in nature given that we have not seen other
recoveries in this asset class yet. That said, we feel our equity recovery estimates are conservative
given they represent ~11% of our total NAV recovery. We do not anticipate recoveries on CMBS or on
CLOs given that we view these marks as appropriately conservative but not offering significant upside.
Figure 12 outlines our analysis, and, according to our calculations, ACAS has approximately $2 per
share in book value recovery, or approximately 22% upside to current NAV.

FIGURE 12: Potential Upside to ACAS NAV through Recovery of Unrealized Depreciation

ACAS Potential NAV Appreciation (mm's)

Unrealized Depreciation as
of 6/30/10 Recovery % Effect on NAV
NAV per Share as of 6/30/10 $9.15

75% Recovery of Accruing Loans ($153) 75% $114.8

45% Recovery on Other Senior Loans* ($154) 45% $69.3
45% Recovery on ECAS Equity* ($859) 45% $386.3
15% Recovery on Subordinated Loans* ($225) 15% $33.8
10% Recovery on Preferred Stock* ($490) 10.0% $49.0
8% Recovery on Common Stock* ($342) 8% $27.3
5% Recovery on Warrants* ($22) 5% $1.1
Total ($2,244) 30.4% $681.51

Shares Outstanding 340

Total Upside to NAV per share $2.00

Total Potential NAV per share $11.15

Source: Company reports and JMP Securities

DIVIDEND OVERVIEW & NET CAPITAL LOSS CARRY FORWARD ANALYSIS

In accordance with RIC rules, ACAS must distribute a minimum of 90% of its net investment income
plus net capital gains for any given taxable year. ACAS has not declared a dividend since 2Q09 given
losses and RIC and debt restrictions. We note that, as of 6/30/10, ACAS had an asset coverage ratio of
206% and therefore had no dividend restrictions based upon RIC considerations or under its debt
agreements.

That said, we believe that ACAS will have a capital loss carry forward of ~$600 mm as of its tax year,
which can be used to shield investment income and investment gains going forward. Therefore, ACAS
is in a unique position in which it does not have to distribute RIC earnings in the form of dividends until it
has exhausted the tax shield from its capital loss carry forward. The net capital loss carry forward may
be carried for eight years. According to our model, we are forecasting for ACAS to make ~$600 mm in
core earnings between now and approximately 2012 and therefore believe that ACAS will not have to
pay any taxes and / or dividends until late CY11 or early CY12. However, given that we do not forecast
for realized gains, it is possible that, as a result of unanticipated gains, ACAS will have to pay a dividend
before this period. Therefore, we anticipate that ACAS will begin paying dividends in early CY12, which
could be accelerated if the portfolio performs well. In all, according to our calculations we believe that
ACAS can shield $1.50-$2.00 of income per share with the capital loss carry forward equating to 15%-
22% of NAV appreciation. As discussed, we believe ACAS will have the capacity to pay a $0.80-$0.85
dividend per share in 2012, equating to a 16% dividend yield at the current price.

As an aside, the IRS is permitting ACAS to follow the 90:10 stock cash dividends rule for dividend
payments through 2011. Therefore, ACAS can pay dividends with 90% stock and 10% cash through its
2011 tax year, although we do not forecast for dividends during this period.

12
ACAS CREDIT PERFORMANCE OVERVIEW

ACAS experienced significant realized and unrealized losses throughout the recession in part due to its
equity and preferred equity exposure and in part due to the fact that ACAS was very active in originating
investments during 2006 and 2007 when the risk of loss was increasing. Figure 13 below highlights
ACAS' portfolio by security type and further breaks down the cost versus fair market value for these
investments. We note that preferred stock and equity write downs account for nearly 30% of the
portfolio depreciation, not including ACAS' investment in ECAS, which alone represents over 31% of the
unrealized loss. Additionally, we note that ACAS' investments in CMBS represent 14% of the losses.
As we discussed, at CYE 2007, ACAS' portfolio was composed of 54% debt, 40% equity, and 6%
structured products, and, as the economy entered into a downturn, ACAS was more susceptible to
losses relative to peer BDCs that had less exposure to non-debt securities.

FIGURE 13: ACAS Fair Value Marks by Asset Class ($ mms)

Fair Market % of Portfolio

Investment Type Cost Value Gain/(loss) % Gain/(loss) Gain/(loss)
Warrants $93 $71 -$22 -23.5% 0.8%
Subordinated debt $2,157 $1,932 -$225 -10.4% 8.2%
Senior debt $1,995 $1,688 -$307 -15.4% 11.2%
Preferred stock $1,574 $1,085 -$490 -31.1% 17.8%
Common stock (ex ECAS) $701 $359 -$342 -48.8% 12.4%
CMBS $413 $30 -$383 -92.8% 13.9%
CLO $233 $117 -$116 -49.7% 4.2%
ECAS (Equity) $1,267 $409 -$859 -67.7% 31.3%
Total Portfolio $8,439 $5,694 -$2,745 -32.5% 100.0%
Source: Company reports and JMP Securities

While the peer group average of non-accrual assets to total assets has been in the mid to high single
digits (as a % of cost), we note that ACAS’ equivalent level of non-accrual assets has been in the mid-
teens. As a result of impairments on its investments, ACAS breached the 1:1 BDC leverage test, and a
series of events eventually led to the debt exchange in 2Q10 to avoid bankruptcy. Figure 14 below
provides an overview of ACAS' non-accruals through the recession with the graph representing the % of
non-accruals to total loans and the actual dollar amounts in the table below. We note that credit trends
appear to be stabilizing but that ACAS is clearly still working through its credit problems with a
meaningful portion of its portfolio remaining on non-accrual or past due. Additionally, 2Q10 marked a
modest uptick in non-accruals after three quarters of generally improving credit.

FIGURE 14: ACAS Non-Accrual and Past Due Loans

Non-Accrual Loans Past Due for ACAS Since 1Q08

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A

Past due and non-accrual loans at cost as a % of total loans Non-accrual loans at FV as a % of total loans

1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A
Loans on non-accrual at cost $375 $481 $602 $871 $1,103 $1,025 $912 $811 $671 $686
Loans on non-accrual at FV $80 $116 $135 $150 $214 $310 $285 $290 $263 $308
Past due loans at cost $106 $42 $80 $50 $41 $45 $209 $88 $47 $57
Past due and non-accrual loans at cost as a % of total loans 8.2% 8.6% 10.7% 14.5% 18.1% 19.4% 21.5% 18.1% 15.4% 16.5%
Non-accrual loans at FV as a % of total loans 1.5% 2.1% 2.4% 2.9% 4.4% 7.2% 6.9% 7.8% 7.0% 8.5%

Source: Company reports and JMP Securities

13
While non-accruals appear to be stabilizing at ACAS, as Figure 15 shows, other elements of ACAS'
private finance portfolio also appear to be improving, with overall debt to EBITDA levels declining
overall since mid-2009 and with the average interest coverage ratios improving as well. We note that
the overall improvement of the credit statistics may imply that in-flows to non-accruals should slow.
Additionally, the enhanced portfolio quality could likely lead to some recoveries of unrealized
appreciation as we previously analyzed.

FIGURE 15: ACAS Credit Quality Metrics Imply Stabilization, in Our View

1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A
Mean Net Debt to Valuation EBITDA N/A N/A N/A 4.0 4.2 4.4 4.6 4.5 4.3 4.3
Total Net Debt to Valuation EBITDA N/A N/A N/A 5.1 5.3 6.5 5.9 5.8 5.5 5.5
Debt to EBITDA 5.9 6.0 6.0 5.9 5.8 6.0 6.3 6.0 5.9 5.9
Interest Coverage 1.9 1.8 1.9 2.0 2.0 2.1 2.0 2.2 2.2 2.3
Debt Service Coverage 1.6 1.8 0.6 1.7 1.7 1.7 1.7 1.8 1.8 1.8

Source: Company reports and JMP Securities

Lastly, we look at cumulative unrealized gains and losses and compare and contrast this with the peer
group. Figure 16 highlights ACAS' cumulative realized and unrealized gains and losses. Since 1Q08,
ACAS has experienced significant realized and unrealized losses in its portfolio. Figure 16 exhibits a
general positive trend in the portfolio since late CY09. The cumulative unrealized losses are shrinking
as a percentage of total investments at cost, and we expect future realized loss events to slow in the
future as a result. From the figure, we believe ACAS is working through its peak charge off period and
will be emerging from this phase in the near term.

FIGURE 16: ACAS Realized and Unrealized Gains/Losses

ACAS Cumulative Realized and Unrealized Losses as % of Average Investments at

Cost

1Q08A 2Q08A 3Q08A 4Q08A FY08A 1Q09A 2Q09A 3Q09A 4Q09A FY09A 1Q10A 2Q10A
10.0%

0.0%

-10.0%

-20.0%

-30.0%

-40.0%

-50.0%

-60.0%

Cum Real. Losses as % Avg Investments (Cost) Cum FV Marks as % of Avg Investments (Cost)

Source: Company reports and JMP Securities

MANAGEMENT

Malon Wilkus, Chairman and CEO: Malon Wilkus founded American Capital, Ltd. in 1986 and has
served as its Chief Executive Officer and Chairman of the Board of Directors since that time, except for
the period from 1997 to 1998 during which he served as Chief Executive Officer and Vice Chairman of
the Board of Directors. He also served as President of the company from 2001 to 2008 and from 1986
to 1999. In addition, Mr. Wilkus is the President of American Capital, LLC, ACAS’ fund management
portfolio company. He is also Chief Executive Officer, President, and Chairman of the Board of
Directors of American Capital Agency Corp.

John R. Erickson, President, Structured Finance and CFO: John R. Erickson has served as the
President, Structured Finance of American Capital, Ltd. since 2008 and as its Chief Financial Officer
since 1998. He also served as Secretary of the company from 1999 to 2005 and an Executive Vice
President from 2001 to 2008. From 1998 to 2001, Mr. Erickson was a Vice President.

14
Gordon O'Brien, President, Structured Finance and Operations: Gordon O'Brien joined American
Capital in October 1998. In July 2008 he was named to his current position. From 1995 to 1998, Mr.
O'Brien was Vice President at Pennington Partners & Company, a private equity firm where Mr. O'Brien
was responsible for structuring private equity investments, conducting due diligence, negotiating debt
agreements, and managing portfolio companies. Prior to his tenure at Pennington Partners, Mr. O'Brien
worked at Golder, Thoma, Cressey, Rauner, Inc., a private equity firm, and before that at Chemical
Bank in Chicago. Mr. O'Brien holds a graduate degree in business from the University of Chicago and
an undergraduate degree from the University of Pennsylvania, Wharton School of Business.

Ira Wagner, President, European Private Finance: Ira Wagner initially joined American Capital Ltd.
in 1986 and rejoined in October 1997 as a Principal. In August 2008 he became President, European
Private Finance. He led the development of American Capital’s European private finance platform
beginning in 2004, being named President of European Capital Financial Services in 2005. In addition,
Mr. Wagner led the development of American Capital’s Syndications Team in New York beginning in
2005, which is responsible for placing senior debt underwritten by American Capital. Prior to earning
his M.B.A. at the University of North Carolina at Chapel Hill in 1985, Mr. Wagner was the co-founder of
a business distributing imported auto parts in western New England from 1975 through 1982.

Brian Graff, Senior Managing Director: Mr. Graff has served as a Senior Vice President since 2004
and as a Senior Managing Director since 2008. From 2005 to 2008 he served as a Regional Managing
Director and from 2004 to 2005 he served as a Managing Director. Mr. Graff also served as a Vice
President and Principal from 2001 to 2004. From 2000 to 2001, he was a Principal of Odyssey
Investments Partners, a private equity fund. Mr. Graff holds a B.S. degree in Accounting from the State
University of New York at Binghamton and an M.B.A. from NYU's Stern School of Business.

Darin Winn, Senior Managing Director: Darin Winn joined American Capital in August 1998 as a
Principal opening the Dallas office, was promoted to Managing Director in 2001, became a member of
the Investment Committee in 2002 and was promoted to Regional Managing Director in 2005 and then
to Senior Managing Director in 2008. Mr. Winn leads the Dallas office with a team of eleven investment
professionals; that team is responsible for managing a portfolio of thirteen investments comprising
approximately $285 million in assets. Prior to joining American Capital, from 1995 to 1998 Mr. Winn
was with Stratford Capital Partners, a $130 million mezzanine and equity fund controlled by Hicks,
Muse, Tate & Furst. While with Stratford. Mr. Winn holds a Bachelor of Business Administration in
Finance from the University of Texas at Austin.

OUR MODEL

Our focus is on net investment income, the individual components of which generally are recurring in
nature. As a note, we do not include a forecast for realized gains and/or losses in our models as there
generally is little or no visibility into this component of a BDC’s operations. And while we acknowledge
that fair value adjustments are a quarterly reality for all BDCs, we also do not include a forecast for
unrealized gains and/or losses in our models given that most of a BDC’s investments are in private
companies for which there exists no publicly available market price/quotation.

While the recovering capital and credit markets appear to be generating a strong flow of potentially
attractive investment opportunities, ACAS remains partially constrained in investing, and we highlight
the near-term benefits of continued de-levering. We are currently modeling for a period of net portfolio
run-off until ACAS has paid down additional debt before we expect portfolio begin to grow again in
2012. We are modeling modest balance sheet growth in 2012.

In terms of all-in investment yields, including interest, fees, dividends, and other income, we anticipate
some yield expansion due to increasing spreads in the coming quarters, and we would expect this to
continue through 2011 and 2012. Although the capital and credit markets have experienced significant
tightening in terms of spreads, the middle market has not rallied to the same extent as the high yield or
high grade credit market, and therefore we do anticipate modest earning asset yield growth in our
model.

With that, when we fold our assumptions into our earnings model, we arrive at FY10, FY11, and FY12
net investment income per share estimates of $0.67, $0.78, and $1.02, respectively. Additionally, we
are anticipating that ACAS resumes paying a dividend in 2Q12, and we forecast a CY12 dividend of
$0.60 per share, beginning in 2Q12 and reflecting $0.20 per quarter. We will monitor ACAS' progress in
terms of following its strategy, which could affect how quickly the company is able to return to paying a

15
dividend again. Figure 17 below provides an overview of our assumptions for our 2010, 2011, and 2012
results.

FIGURE 17: Model Overview

Model Summary (000s)

2010Y/E 2011Y/E 2012Y/E
Total Investments $5,279 $5,005 $5,872
Debt $2,389 $1,708 $2,513
Stockholders' Equity $3,225 $3,471 $3,570
Debt/Equity 0.7x 0.5x 0.7x
BDC Debt/Equity 0.7x 0.5x 0.7x
Earning Asset Yield 10.82% 11.12% 11.42%
Cost of Funds 5.82% 5.42% 5.02%
Total Investment Income $607 $553 $608
Total Expenses $402 $313 $314
NII per Share - Core EPS $0.64 $0.72 $0.89
Dividends per Share $0.00 $0.00 $0.60
Book Value per Share $9.49 $10.21 $10.49

Source: Company reports and JMP Securities

16
 FIGURE 18: ACAS Earnings Model

American Capital, Ltd (ACAS)

2009 Actual 2010 Estimates 2011 Estimates 2012 Estimates
Yr-End: December 31
($mms) FY08A 1Q09A 2Q09A 3Q09A 4Q09A FY09A 1Q10A 2Q10A 3Q10E 4Q10E FY10E 1Q11E 2Q11E 3Q11E 4Q11E FY11E 1Q12E 2Q12E 3Q12E 4Q12E FY11E
Income statement ($000s)
INVESTMENT INCOME
Interest and dividend income
Non-controlled/non-affiliate investments 597 124 71 110 83 388 93 74 71 70 308 69 69 69 69 277 72 76 79 83 309
Affiliate investments 39 9 13 14 11 47 8 7 7 7 29 6 6 6 6 26 7 7 7 7 28
Control investments 314 46 43 52 62 203 49 57 57 56 219 53 51 50 50 203 51 53 55 57 216
Interest and dividend income 950 179 127 176 156 638 150 138 136 133 557 129 127 127 127 510 130 137 144 151 561

Asset management and other fee income

Non-controlled/non-affiliate investments 35 4 4 9 4 21 4 4 4 4 15 4 4 4 4 15 4 4 5 5 18
Affiliate investments 1 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Control investments 65 12 9 8 8 37 10 9 9 9 36 8 8 8 8 32 9 9 9 10 36
Asset management and other fee income 101 16 13 17 13 59 14 13 12 12 51 12 12 12 12 48 13 14 14 15 56

Total investment income 1,051 195 140 193 169 697 164 151 148 145 608 140 139 139 139 558 143 151 158 165 617

NOTE: Total investment income

Non-controlled/non-affiliate investments 632 128 75 119 87 409 97 78 75 73 323 73 73 73 73 292 76 80 84 88 328
Affiliate investments 40 9 13 14 12 48 8 7 7 7 29 6 6 6 6 26 7 7 7 8 28
Control investments 379 58 52 60 70 240 59 66 66 64 255 61 58 58 58 234 59 62 64 67 252
Total investment income 1,051 195 140 193 169 697 164 151 148 144 607 140 138 137 137 553 142 149 155 162 608

NOTE: PIK dividend & interest 177 26 (12) 8 53 75 46 36 35 33 151 33 31 31 31 126 31 32 34 36 133
PIK div & int as % total investment income 16.8% 13.3% -8.6% 4.1% 31.4% 10.8% 28.0% 23.8% 23.9% 23.0% 24.8% 23.4% 22.2% 22.5% 22.2% 22.6% 21.9% 21.5% 21.7% 21.5% 21.6%

105
OPERATING EXPENSES
Interest 220 52 60 85 59 256 57 56 42 36 191 32 29 26 24 110 24 26 29 31 110
Salaries, benefits and stock-based compensation 206 53 47 47 68 215 34 34 34 34 136 34 34 35 35 138 35 35 36 36 142
Debt refinancing costs 0 17 0
General and administrative 95 26 24 28 33 111 24 15 17 17 74 16 16 16 16 62 16 16 16 16 62
Total expenses 521 131 131 160 160 582 115 122 93 87 400 82 78 76 75 311 75 77 80 82 314

Net operating income (before taxes) 530 64 9 33 9 115 49 46 55 58 208 59 61 63 65 247 69 73 77 83 303
17

Total tax (benefit) expense 37 0 (11) 1 (10) (20) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Net investment income 493 64 20 32 19 135 49 46 55 58 208 59 61 63 65 247 69 73 77 83 303

Realized/unrealized gain (loss) on investments & FX:

Net realized gains (losses):
Non-controlled/non-affiliate investments 37 (50) (219) (27) 43 (253) (40) (230) (270)
Affiliate investments (22) (5) 0 0 2 (3) 0 7 7
Control investments 117 (24) (89) (20) (327) (460) (67) (68) (135)
Taxes on net realized gain (54) 0 0 0 0 0 0 0
Foreign currency (6) (2) 0 0 (1) (3) (3) 1
Derivative agreements (40) (50) (18) (19) (19) (106) (16) (30) (46)
Total net realized gain (loss) on investments 32 (131) (326) (66) (302) (825) (126) (320) (444)

Net unrealized gains (losses):

Portfolio company investments (3,480) (525) (311) 86 410 (340) 357 695 1,052
Foreign currency translation (41) (69) 66 57 (26) 28 (87) (125) (212)
Derivative agreements (119) 102 4 (32) 6 80 (6) 2 (4)
Total net unrealized gain(loss) on investments (3,640) (492) (241) 111 390 (232) 264 572 836

Net realized/unrealized gains(losses) on invest (3,608) (623) (567) 45 88 (1,057) 138 252 392

Realized gain on extinguishment of debt 12 0 0 0 12 0 0

Net increase (decrease) in net assets from ops (3,115) (547) (547) 77 107 (910) 187 298 55 58 598 59 61 63 65 247 69 73 77 83 303

Pre-tax income (3,078) (547) (558) 78 97 (942) 187 298 55 58 600 59 61 63 65 247 69 73 77 83 303
Taxes 37 0 (11) 1 (10) (20) 0 0
Net income (3,115) (547) (547) 77 107 (922) 187 298 55 58 600 59 61 63 65 247 69 73 77 83 303
Taxable income 160,305 (55) (306) (34) (283) (678) (77) (274) 55 58 (238) 59 61 63 65 247 69 73 77 83 303

Net Investment Income Per Share - Core EPS $2.42 $0.31 $0.09 $0.12 $0.07 $0.56 $0.17 $0.14 $0.16 $0.17 $0.64 $0.17 $0.18 $0.18 $0.19 $0.72 $0.20 $0.22 $0.23 $0.24 $0.89
GAAP net income per share ($15.29) ($2.65) ($2.52) $0.30 $0.38 ($3.77) $0.65 $0.89 $0.16 $0.17 $1.76 $0.17 $0.18 $0.18 $0.19 $0.72 $0.20 $0.22 $0.23 $0.24 $0.89
Net realized gains (losses) per share $0.16 ($0.63) ($1.50) ($0.26) ($1.06) ($3.42) ($0.44) ($0.95) $0.00 $0.00 ($1.31) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Net unrealized gains (losses) per share ($17.87) ($2.38) ($1.11) $0.43 $1.37 ($0.96) $0.92 $1.70 $0.00 $0.00 $2.46 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Dividends per share (estimated) $3.09 $0.00 $1.07 $0.00 $0.00 $1.07 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.20 $0.20 $0.20 $0.60

Source: Company reports and JMP Securities

 FIGURE 19: ACAS Balance Sheet
FY08A 1Q09A 2Q09A 3Q09A 4Q09A FY09A 1Q10A 2Q10A 3Q10E 4Q10E FY10E 1Q11E 2Q11E 3Q11E 4Q11E FY11E 1Q12E 2Q12E 3Q12E 4Q12E FY12E
Balance sheet ($000s) 1,081.9
Assets: 341.6
Investments (@ Fair Value):
Non-controlled/non-affiliate investments 4,182 4,117 3,837 3,452 3,036 3,036 3,143 3,035 2,931 2,814 2,814 2,825 2,801 2,746 2,761 2,761 2,876 2,999 3,095 3,239 3,239
Affiliate investments 338 335 302 315 204 204 217 216 209 200 200 195 193 190 191 191 199 207 214 224 224
Controlled investments 2,898 2,387 2,046 2,126 2,335 2,335 2,338 2,443 2,359 2,265 2,265 2,102 2,083 2,043 2,054 2,054 2,139 2,231 2,302 2,409 2,409
Total Investments 7,418 6,839 6,185 5,893 5,575 5,575 5,698 5,694 5,498 5,279 5,279 5,122 5,078 4,978 5,005 5,005 5,214 5,437 5,611 5,872 5,872
Cash & cash equivalents 209 88 183 445 835 835 820 176 35 169 169 113 35 191 35 35 164 70 169 69 69
Restricted cash and cash equivalents 71 68 55 132 96 96 79 185 185 185 185 185 185 185 185 185 185 185 185 185 185
Interest receivable 44 44 43 43 38 38 39 32 32 32 32 39 39 39 39 39 39 39 39 39 39
Derivative agreements 9 10 8 9 1 1 2 3 3 3 3 2 2 2 2 2 2 2 2 2 2
Other assets 159 162 154 146 127 127 119 131 131 131 131 131 131 131 131 131 131 131 131 131 131
Total assets 7,910 7,211 6,628 6,668 6,672 6,672 6,757 6,221 5,884 5,799 5,799 5,592 5,469 5,526 5,397 5,397 5,735 5,864 6,137 6,298 6,298

Liabilities:
Debt 4,428 4,377 4,321 4,279 4,142 4,142 4,026 2,924 2,533 2,389 2,389 2,089 1,907 1,903 1,708 1,708 1,975 2,100 2,366 2,513 2,513
Derivative agreements 222 102 92 118 102 102 109 120 120 120 120 120 120 120 120 120 120 120 120 120 120
Accrued dividends payable 0 0 231 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Other 105 78 94 81 99 99 96 64 64 64 64 96 96 96 96 96 96 96 96 96 96
Total liabilities 4,755 4,557 4,738 4,478 4,343 4,343 4,231 3,108 2,717 2,573 2,573 2,305 2,123 2,119 1,924 1,924 2,191 2,316 2,582 2,729 2,729
Total stockholders' equity 3,155 2,654 1,890 2,190 2,329 2,329 2,526 3,113 3,167 3,225 3,225 3,286 3,347 3,408 3,471 3,471 3,541 3,548 3,558 3,570 3,570

Total liabilities & stockholders' equity 7,910 7,211 6,628 6,668 6,672 6,672 6,757 6,221 5,884 5,799 5,799 5,592 5,469 5,526 5,397 5,395 5,735 5,864 6,137 6,298 6,299

Leverage:
Debt/equity (limited to 1:1) 1.4x 1.6x 2.3x 2.0x 1.8x 1.8x 1.6x 0.94x 0.80x 0.74x 0.74x 0.64x 0.57x 0.56x 0.49x 0.49x 0.56x 0.59x 0.67x 0.70x 0.70x
Assets/equity 251% 272% 351% 304% 286% 286% 267% 200% 186% 180% 180% 170% 163% 162% 155% 155% 162% 165% 172% 176% 176%
Equity/assets 40% 37% 29% 33% 35% 35% 37% 50% 54% 56% 56% 59% 61% 62% 64% 64% 62% 61% 58% 57% 57%
Net asset value per share $15.41 $12.32 $8.76 $7.80 $8.29 $8.29 $8.98 $9.15 $9.31 $9.48 $9.48 $9.66 $9.84 $10.02 $10.21 $10.21 $10.41 $10.43 $10.46 $10.50 $10.50

Source: Company reports and JMP Securities

18
JMP FACTS AND DISCLOSURES

Analyst Certification:
The research analyst(s) who prepared this report does/do hereby certify that the views presented in this report are in accordance with my/our personal views on the securities
and issuers discussed in this report. As mandated by SEC Regulation AC no part of my/our compensation was, is or will be directly or indirectly related to the specific views
or recommendations expressed herein. This certification is made under the obligations set forth in SEC Regulation AC. Any other person or entity may not use it for any other
purpose. This certification is made based on my/our analysis on the date of this report’s publication. I/We assume no obligation to update this certification to reflect any facts,
circumstances or events that may subsequently come to my/our attention. Signed, John Hecht

Publicly Traded Companies Mentioned in This Report:

American Capital Agency Corp. (1,3), AGNC, $27.01, Market Perform; American Capital, Ltd. (1), ACAS, $5.89, Market Outperform; Kohlberg Capital Corporation (1,5),
KCAP, $6.75, Market Perform; MVC Capital, Inc. (1), MVC, $13.06, Market Outperform.

JMP Securities Disclosure Definitions:

(1) JMP Securities currently makes a market in this security. (2) JMP Securities has received compensation for banking or other services rendered to this company in the past
12 months. (3) JMP Securities was manager or co-manager of a public offering for this company in the past 12 months. (4) JMP Securities participated as an underwriting or
selling group member of a public offering by this company in the past 12 months. (5) JMP Securities and/or its affiliates have obtained a position of at least 1% in the equity
securities of this company during the ordinary course of its/their business/investments. (6) An officer of JMP Securities is a director or officer of this company. (7) The analyst
covering this company (as defined in NASD Rule 2711) or a member of the analyst's household has a financial interest in this company. (8) The analyst covering this company
or a member of the analyst’s household serves as an officer, director, or advisory board member of this company. (9) The analyst covering this company has had discussions
of employment with the company.

JMP Securities Investment Opinion Definitions:

Market Outperform (MO): JMP Securities expects the stock price to outperform relevant market indices over the next 12 months.
Market Perform (MP): JMP Securities expects the stock price to perform in line with relevant market indices over the next 12 months.
Market Underperform (MU): JMP Securities expects the stock price to underperform relevant market indices over the next 12 months.

JMP Securities Research Ratings and Investment Banking Services: (as of October 1, 2010)
# Co's
# Co's % # Co's % Receiving % of Co's
Regulatory Under of Regulatory Under of IB Services in With This
JMP Rating Equivalent Coverage Total Rating Coverage Total Past 12 Months Rating

Market Outperform Buy 193 62% Buy 193 62% 31 16%

Market Perform Hold 117 37% Hold 117 37% 9 8%
Market Underperform Sell 3 1% Sell 3 1% 0 0%

TOTAL: 313 100% 313 100% 40 13%

Stock Price Chart of Rating and Target Price Changes:

Note: First annotation denotes initiation of coverage or 3 years, whichever is shorter. If no target price is listed, then the target price is N/A. If the latest date is different than
the report date, then the price is as of the previous day’s close. The action reflected in this note is not annotated in the stock price chart. Source: FactSet and JMP Securities.

19
JMP Disclaimer:
JMP Securities LLC (the “Firm”) compensates research analysts, like other Firm employees, based on the Firm’s profitability, which includes revenues from the Firm’s
institutional sales, trading, and investment banking departments as well as on the quality of the services and activities performed that are intended to benefit the Firm’s
institutional clients. These data have been prepared by JMP Securities LLC for informational purposes only and are based on information available to the public from sources
that we believe to be reliable, but we do not guarantee their accuracy or completeness. Any opinions and projections expressed herein reflect our judgment at this date and
are subject to change without notice. These data are neither intended nor should be considered as an offer to sell or a solicitation or a basis for any contract for the purchase
of any security or other financial product. JMP Securities LLC, its affiliates, JMP Group LLC, Harvest Capital Strategies LLC, and their respective partners, directors, officers,
and associates may have a long or short position in, may act as a market maker for, or may purchase or sell a position in the securities mentioned herein. JMP Securities
LLC or its affiliates may be performing, have performed, or seek to perform investment banking, advisory, or other services and may have acted as manager or co-manager
for a public offering of securities for any company mentioned herein. The reader should assume that JMP Securities LLC will solicit business from the company covered in
this report. © Copyright 2010. All rights reserved by JMP Securities LLC. JMP Securities LLC is a member of FINRA, NYSE Arca, NASDAQ, and SIPC.

20
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