Can American Capital find a rich suitor?

More consolidation may be coming to the world of private equity lenders. Debt-laden Allied Capital solved its long-standing problems last week when it sold itself to Ares Capital. Rival American Capital, once an S&P 500 component but now struggling for survival, could be the next takeover target.

But some investors wonder if Allied got a raw deal. Ares paid $3.47 a share in stock for a company that had a book value of $7.49 in June. One law firm has already launched a “shareholder investigation“. Similarly, American Capital’s shares trade below $3, compared with a book value of $8.76 at the end of June.

Ares Capital is one of the rare healthy players in the field. It has a strong balance sheet and minimal liquidity concerns, and it has managed to pay a dividend throughout the worst U.S. recession since the Great Depression. For an Allied shareholder used to a continuous flow of bad news, swapping that stake for an investment in a healthy company must seem like a good move.

Like Allied, American Capital has suffered as the recession reduced the value of the companies it invested in. As a result, it’s gotten harder to sell them except at distressed prices. That value reduction is a big blow for a cash-starved company that has already defaulted on $2.3 billion of debt.

Both American Capital and Allied have sold portfolio companies at heavy discounts to their purchase prices. Now with equity markets sharply up from their doomsday-scenario lows in March, American Capital is on an aggressive selling spree. Recently it sold components distributor Imperial Supplies to W.W. Grainger and life sciences equipment maker Axygen BioScience to Corning.

Diamonds in the rough

Diamond pictureSomewhere out there are ailing companies in need of a turnaround specialist. These experts — also known as company doctors — parachute into troubled businesses to turn their business around.

Funds, such as Oaktree Capital, HIG Capital and Apollo Management, specialise in buying up companies in distress (either through buying equity or debt) and turning them round.

And this should be a great time for these investors — banks are loaded with stakes in troubled companies and unwieldy corporates may want to spin off unwanted businesses.