Allied Capital ALD
Greenlight argues Allied Capital overstates NAV by mismarking illiquid BDC loans and funds its dividend with non-cash PIK income and fees from Enron-Raptor-style controlled subsidiaries.
Thesis
David Einhorn's Greenlight Capital argues Allied Capital (ALD) — a Regulated Investment Company and BDC — systematically overstates Net Asset Value by applying Small Business Administration impairment rules rather than the SEC fair-value standards required under the 1940 Act. Greenlight estimates 35% of Allied's specialty finance portfolio is carried above fair value, citing named mismarks in Velocita, Startec, Loewen, and NetTel, and claims Allied has deferred over $65mm of charge-offs by classifying permanent losses as 'unrealized depreciation.' Roughly two-thirds of Allied's $180mm dividend is funded by $65mm of non-cash PIK interest plus $56mm of fees and interest from controlled companies like Business Loan Express — which Allied charges 25% interest and whose third-party debt Allied guarantees, a structure Greenlight compares directly to Enron's Raptors. Because Allied must issue stock at a premium to NAV to sustain its 10%-dividend-growth pledge, any loss of confidence in the markings collapses the funding model.
SCQA
Allied Capital is a publicly-traded Business Development Company that makes illiquid mezzanine loans and equity investments in middle-market companies and pays out a fast-growing dividend funded by the portfolio's stated fair-value earnings.
Allied values that portfolio using SBA impairment rules rather than SEC fair-value standards, delays recognition of losses, books outsized fees from controlled subsidiaries, and funds a third of its dividend from non-cash PIK interest.
Greenlight asks Allied to disclose Business Loan Express financials and all controlled-company results, publish contemporaneous valuation analyses for the criticized investments, and remark its entire portfolio to current fair value under the 1940 Act.
If Allied is forced to remark the portfolio and loses access to premium-to-NAV equity issuance, the dividend funding model breaks, NAV compresses, and the stock re-rates materially lower — Greenlight is short.
The three reasons
- 1
Allied uses SBA rules instead of SEC fair-value standards — Greenlight estimates 35% of the specialty finance portfolio is mismarked
- 2
Business Loan Express, Allied's largest investment, is an Enron-Raptor-style controlled entity whose guaranteed debt hides economic reality
- 3
Roughly two-thirds of Allied's $180mm dividend is funded by non-cash PIK income and fees from controlled subsidiaries
Primary demands
- Disclose full financial statements for Business Loan Express and all other controlled companies
- Publish contemporaneous valuation analyses for criticized investments (Velocita, Startec, Loewen, NetTel)
- Mark illiquid portfolio to current fair value per SEC 1940 Act standards rather than SBA impairment rules
- Recognize permanent value losses as charge-offs rather than as 'unrealized depreciation'
KPIs cited
Pattern membership
Precedents cited
- Enron Raptors (structural analogy for Business Loan Express)
- Sirrom Capital (Arthur Andersen audit-letter language change, prior BDC collapse)
- Seitel (Lanny Davis retained to defend questionable accounting)
- Greenlight prior shorts: Conseco, Compucredit, Resource America
Composition what's on the 25 slides
Slide gallery ·
Notes
Written research note (not a slide deck) — David Einhorn's detailed prose follow-up to his May 15, 2002 Ira W. Sohn Conference short presentation of Allied Capital (ALD). Word-document format, Times Roman body, numbered footnotes, no charts/images/branding. Nine-point executive summary on pages 2-3 enumerates the fraud-exposure thesis. Substantial portions rebut Allied's May 16 and May 29 conference-call counterattacks and Merrill Lynch's defensive sell-side note, and include a long transcribed dialogue with SEC Chief Counsel Douglas Scheidt establishing that BDCs are not exempt from 1940 Act fair-value rules. Heavy CEO-quote-contradiction rhetoric: Walton's 'quick buck' smear, Sweeney's audit-guide explanation, and Merrill Lynch's 'we were mistaken' retraction all dismantled with primary sources. Became the opening chapter of one of the longest public short-seller battles in US history and the basis for Einhorn's 2008 book 'Fooling Some of the People All of the Time'.