By Terence O'Hara
Post
Monday, May 9, 2005; E01

D avid Gladstone apparently hasn't lost his knack for raising money in the public equity markets after 25 years in the commercial finance business.

Gladstone, who formed his own company four years ago, has registered another fund for an initial stock offering. Gladstone Investment Corp . would be the third publicly traded fund managed by Gladstone. According to Securities and Exchange Commission filings, Gladstone Investment plans to raise $207 million and the fund would be traded under the symbol GAIN.

Gladstone's other two public funds, Gladstone Capital Corp . and Gladstone Commercial Corp ., trade under the symbols GLAD and GOOD, respectively.

All three are managed by a fourth company, Gladstone Management Corp ., a private company controlled by chief executive Gladstone and run by him, Chief Operating Officer Terry Lee Brubaker and Chief Investment Officer George "Chip" Stelljes III .

SEC filings indicate that Gladstone also has formed a company called Gladstone Partners Fund , a private limited partnership that, at least as of December, was raising money from institutional investors.

Company officials at Gladstone Management could not comment because SEC rules bar statements by officials of companies planning an IPO. But the thinking and the strategy behind its multi-fund corporate structure is amply laid out in various SEC filings, not to mention in David Gladstone's history.

Gladstone Capital had a 12-month total return of about 17 percent as of Friday, based on its stock price and the dividends it paid. The group's other publicly traded fund, the two-year-old real estate investment fund Gladstone Commercial, had a total return of about 5 percent.

Gladstone specializes in what's known as mezzanine lending. As the name suggests, mezzanine loans are in the middle: They are not senior loans or lines of credit, which are often secured by a business's assets and have first claim on them. For many mid-size companies that need capital to expand or acquire other businesses, taking on mezzanine-level debt is the only way to have an adequate capital cushion . For those who provide it, mezzanine lending can be riskier than traditional bank lending, but it's also a lot more profitable.

Many mezzanine lenders, including Gladstone Capital and the new Gladstone Investment, are business development companies. BDCs have some tax advantages, but they also are required to provide management assistance to their customers. So they not only charge higher interest rates for their loans, they also charge fees to their customers for management advice. Mezzanine loans also sometimes include equity "kickers," usually stock warrants, that allow a lender to profit from an increase in the value of the underlying business.

Most mezzanine lenders make loans for acquisitions or to finance management- or employee-led buyouts of existing businesses.

David Gladstone, 62, has been in this line of business longer than anybody. Gladstone was at Washington's Allied Capital Corp ., the biggest BDC, from 1974 to 1997, rising to chief executive. Before he split with Allied, he had structured the company as a multi-fund business. Allied had as many as five publicly traded companies in the 1990s and managed some private funds as well. After Gladstone left, Allied abandoned the multi-company structure and collapsed all its publicly traded entities into the one company it is today.

When Gladstone left Allied, he moved to American Capital Strategies Ltd . For four years, he was chairman or vice chairman of that Bethesda-based mezzanine lender, which specializes in debt-financed buyouts. He left to start his own company in August 2001.

Now it looks as if he is creating the Gladstone family of funds in Allied's old image. Like Allied in the past, Gladstone will have multiple publicly traded funds, including one func, Gladstone Commercial, that specializes in financing real estate used by its business customers.

The main reason for the multi-fund business is straightforward: Creating a new fund allows the management company, in this case Gladstone Management, to raise more money -- to do more and bigger loans -- without having to constantly sell new stock, which can dilute the stake of shareholders in an existing fund.

The drawback is that the multi-fund, externally managed structure can be cumbersome and difficult to understand and manage. That's why Allied Capital did away with it in 1999.

A third "blank check" company in the Washington area filed for an IPO last month.

Community Bankers Acquisition Corp . of Alexandria filed with the SEC to raise up to $60 million by selling units composed of stock and warrants. It is being underwritten by an investment banking outfit out of Texas called I-Bankers Securities Inc .

Community Bankers Acquisition, like all blank-check companies, seeks to raise money before owning an operating business. In this case, the company said it plans to use the money to buy small banks, but it doesn't say which ones. The company is chaired by Texas banker David Zalman . The chief executive is Gary A. Simanson , a lawyer and investment banker who specializes in bank mergers.

Mercator Partners Acquisition Corp. , a Reston blank-check firm seeking to buy telecommunications companies, sold stock in a public offering last month. Fortress America Acquisition Corp., a Bethesda blank-check company formed to buy homeland security companies, is registeringfor an IPO.

Terence O'Hara's e-mail address isoharat@washpost.com.