American Capital Start-Up Stake Unwinds

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Writedown Worries

American Capital has been a stellar performer over the past decade, as its equity investments reaped a 33% compound annual return over the last 10 years, according to the firm's calculations.

But the stock, at around $31, has fallen 38% from its 52-week high last February. Short-sellers now make up 7.7% of the float, betting that many of American Capital's investments are now set to go sour with a slowing economy and fewer exit opportunities because of problems in the credit markets.

In November, TheStreet.com reported that another firm in which American Capital had invested closed its doors and was on the verge of bankruptcy.

American Capital also recently avoided booking a large loss on its poorly performing investment in U.K. firm European Capital by employing aggressive accounting assumptions.

The worry for American Capital investors is that numerous writedowns may be looming. This issue is important because the firm has been known to book "unrealized gains" in recent quarters by marking up the accounting value of its investments. That results in higher earnings that make it appear as though the company is easily covering its dividend.