Bill Walton, Allied Capital's Chairman and CEO.

As you may have seen in our 2005 financial results, Allied Capital’s continued success in the private equity marketplace drove superior results for our company—and for our shareholders. 

We generated a record level—over $400 million— of net investment income and net realized gains in 2005. With the sale of our CMBS/CDO portfolio and other portfolio company exits, net gains totaled $273.5 million, an all-time high. We also grew our private finance portfolio by 51% to $3.5 billion, funding $1.5 billion in new investments.

With this investment performance, we paid a record $315 million in dividends to shareholders. And because we earned more in taxable income than we paid in dividends, we are carrying over approximately $160 million from 2005 to pay 2006 dividends. Our total return to shareholders in 2005 was 23.5%, versus 4.9% for the S&P 500.

2006 is off to a good start, too, highlighted by a gain of approximately $430 million on the sale of our majority equity interest in Advantage Sales & Marketing.   

Our results in 2005 demonstrate two important competitive advantages that we enjoy as a private equity investor. The first is our team of talented professionals, with experience and expertise in both business and credit disciplines. The second is our conservative capital base, which, as a publicly traded business development company, consists primarily of permanent equity capital.

The quality of our people and our balance sheet forms the bedrock of our investment strategy. They provide us with the flexibility to opportunistically pursue those areas of the private equity business that offer the most promising risk/return profile. Our success in doing so is evidenced by our track record in commercial mortgage-backed securities, traditional debt investments and, more recently, buyout investments.

We laid the foundation for this strategy back in 1997 with the merger of five public Allied Capital companies into one entity. Our goal was to create a larger and more flexible platform for growth—a platform that would be more efficient, that would enable us to attract and retain top-notch talent, and that would provide the resources to increase both the size of our investments and the size of the companies in which we could invest.

As I stated in our annual report that year, in my first letter as your chairman and chief
executive officer:

“We saw an opportunity to increase our competitive position and improve our operations through the merger of five public companies… We are ready to move forward… in a way that maximizes our competitive advantages and capitalizes on our more efficient structure and powerful balance sheet… Our business plan is geared to long-term, sustainable growth.”

The success of our strategy over the past eight years is clear: we have significantly grown our business, increased our profitability and outperformed industry benchmarks.

From the beginning of 1998 to the end of 2005, the level of assets and the size of our portfolio grew roughly five times in size, increasing by $3.2 billion and $2.9 billion, respectively. Over the same time period, net investment income and net realized gains increased from $57 million in 1997 to $411 million in 2005.

Since the beginning of 1998, we’ve generated nearly $600 million in net realized gains, significantly enhancing the current return on our investment portfolio. In fact, the aggregate cash flow internal rate of return on investments that we have exited since our merger is approximately 20%. This investment portfolio performance has been the foundation for average annual total returns to our shareholders of 23.5%, 17.1% and 19.8% over the last one-, five-, and ten-year periods. For the same periods, the S&P 500 returned 4.9%, 0.5% and 9.1%. And we have achieved these results while maintaining a conservative balance sheet, with leverage at 0.49 to 1 at December 31, 2005.

Dividends paid to shareholders have increased five-fold, from $68 million in 1997 to $315 million in 2005. We have extended our track record of consecutive dividend payments to 43 years—that’s 169 consecutive quarterly dividend payments. We are one of only a few dozen NYSE-listed stocks to have paid steady or increasing regular dividends since 1963, and are one of only two financial services companies in this elite group.