ALLIED CAPITAL CORPORATION is principally a lender to and investor in private companies in a variety of different industries and in diverse geographic locations throughout the United States. The Company has been investing in growing businesses for over 40 years and has financed thousands of private companies nationwide. The Company’s investment activity is focused in three areas:

• private finance;
  
• commercial real estate finance, including the purchase of CMBS; and
  
• Allied Capital Express -- small business and commercial real estate loans of up to $3 million originated for sale.

The Company’s investment portfolio consists primarily of long-term unsecured loans with equity features, commercial mortgage-backed securities, commercial mortgage loans and small senior loans.


PRIVATE FINANCE

The Company provides long-term debt and equity financing to private companies nationwide. The Company’s private finance activities target a market niche between the senior debt financing provided by traditional lenders (such as banks, commercial finance companies and insurance companies) and the equity capital provided by private equity investors.

The Company’s private financing is generally used to fund growth, buyouts, note purchases, acquisitions, recapitalizations, and bridge financings. The Company generally invests in private companies though, from time to time, the Company may invest in undervalued public companies that lack access to public capital. Allied Capital targets two types of companies when seeking new investments.

• The first type of company Allied Capital seeks is a market leader in a stable industry that has demonstrated over many years of operations that it can successfully achieve its business plan and thereby achieve our investment objective.
  
• The second type of company Allied Capital seeks is an emerging company in a growing industry that is positioned for significant growth.

The Company has spent over 40 years refining its highly selective investment discipline, which is founded on seeking portfolio companies having key characteristics and targeting specific industries. The Company’s private finance portfolio is geographically diverse, and includes investments in a wide variety of industries, including business services, consumer products, telecommunications, industrial products and broadcasting.

When assessing a prospective investment, Allied Capital looks for companies that:

• have achieved, or have the potential to achieve, market leadership in a niche, critical mass, and a sustainable cash flow.
  
• because of their industry and business plan, can demonstrate minimal vulnerability to changes in economic cycles;
  
• operate in industries which are non-cyclical, cash flow intensive, and can demonstrate a high return on their invested capital; and
  
• have a significant equity capital base, and a strong private equity sponsor.

1.  COMMERCIAL MORTGAGE LOANS: The Company has been a commercial real estate lender for many years, and maintains a commercial mortgage loan portfolio. The Company continues to seek unique opportunities for commercial mortgage loans for its portfolio when its risk/return objectives can be achieved. These loans are generally priced at higher fixed interest rates and include subordinated real estate loans. The Company derives income from the interest charged on the commercial mortgage loan portfolio through contractual interest and amortization of discounts.

The Company originates small business and commercial real estate loans, primarily for sale, under the brand name "Allied Capital Express." The loans the Company originates in this program are generally for financings of up to $3 million in size, and may be composed of an SBA 7(a) guaranteed loan and a conventional commercial mortgage loan. These loans are sold to banks and other financial institutions for premiums ranging from 5% to 10% of the loan amount sold.

Many of the loans originated under the Allied Capital Express brand name are through its participation in the SBA's 7(a) Guaranteed Loan Program. Under the SBA 7(a) program, the Company extends senior secured loans that are partially guaranteed by the SBA. The Company’s 7(a) loans are provided to small businesses for the purposes of acquiring a business or real estate, purchasing machinery or equipment, or providing working capital. The loans are secured by a mortgage or other liens on the assets of the borrower, and in all cases the owners of the business must personally guarantee the repayment of the loan. The Company focuses its 7(a) loan origination activity on loans secured by commercial real estate assets.

The Company’s 7(a) loans typically range in size from $250,000 to $1 million. The SBA guarantees 80% of any qualified loan up to $100,000 regardless of maturity, and 75% of any qualified loan over $100,000 regardless of maturity, to a maximum guarantee of $750,000 for any one borrower.

The Company is a registered investment adviser, pursuant to the Investment Advisers Act of 1940, and has certain investment advisory agreements to manage private investment funds. The revenue generated from these agreements is not material to the Company's operations.

The Company’s loan servicing staff is responsible for routine loan servicing, which includes:

• delinquency monitoring;
  
• payment processing;
  
• borrower inquiries;
  
• escrow analysis and processing;
  
• third-party reporting; and
  
• insurance and tax administration.