180 Degree Capital (TURN) is a microcap (~$46MM market cap) closed end fund (CEF) pursuing an activist strategy in microcap stocks. Before 2017, some of you might remember the name, it was a venture capital fund known as Harris & Harris Inc (TINY). There are a few similar ones today, these almost never work. CEO Kevin Rendino took over, changed the strategy, but was hampered by their legacy venture portfolio weighting down overall returns. The last few years have been a difficult time for microcap investing, large caps seem to outperform year in and year out, but it's especially difficult to outperform if you're running a subscale internally managed CEF. Expenses create too high of a hurdle to justify a small fund's existence.
I'm going to skip some background but TURN trades at a discount to NAV (not uncommon for CEFs) and has for some time. Naturally activists showed up (Marlton Partners and others) and pushed the company to close the discount by repurchasing shares, liquidating and/or distributing the underlying public equities in TURN's portfolio in-kind to shareholders. To management's credit, TURN did implement a "Discount Management Program", but to limited success.
In January of this year, TURN entered into a reverse merger with private credit manager, Mount Logan Capital Inc (trades as MLC on Cboe Canada) valuing TURN at NAV (later revised to 110%) and Mount Logan at $67.4MM. This transaction potentially fits the "balance sheet to income statement transformation" theme where the market is currently valuing TURN at a multiple of book value and in the future will judge Mount Logan Capital on an earnings basis. Marlton Partners pushed back on the transaction, there was even a counter proposal from another CEF, Source Capital (SOR), at NAV, but TURN rebuffed that deal. Shareholders on both sides of the transaction have now approved the reverse merger with Mount Logan Capital, which should close sometime this month.
Who is Mount Logan Capital? It is an affiliate of BC Partners, where BC Partners credit team's executive management team also doubles as Mount Logan Capital's management team subject to an expense sharing agreement (so not quite an externally managed company). Mount Logan has a random assortment of low-quality asset management contracts plus an owned insurance company where they're managing the float for a total of $2.8B (the graphic is from last November), but that number is puffed up a bit by the insurance AUM and a couple run off management mandates.
Source: November 2024 Investor Presentation
It is unclear to me why Mount Logan exists separate from BC Partners which has its own credit platform and the delineation between the two on future asset management contracts. Management owns some shares here but not really enough to prioritize Mount Logan or become exceptionally rich if it is successful. The incentives are hard to tease out, which likely means they're not well aligned with outside minority shareholders. The relationship with BC Partners is strange, the two BDCs (PTMN and LRFC) recently merged, LRFC was being managed by Mount Logan Capital and PTMN by Sierra Crest Investment Management (a JV where BC Partners is the majority owner, Mount Logan Capital held a minority stake), the combined BDC was rebranded as BCP Investment Corp (BCIC) and will be managed by Sierra Crest. What's the point of Mount Logan?
In the merger proxy, Mount Logan management did put forth some pretty ambitious fee-related earnings projections that seems difficult to achieve:
If the 2026 numbers are to be believed, the $67.4MM valuation put on Mount Logan in the merger (actually less now that its been revised) is only 3.5x FRE (heavily adjusted) and doesn't count the spread earnings they receive from the owned insurance subsidiary. So either BC Partners is so desperate to get Mount Logan off of a backwater Canadian exchange and onto the NASDAQ, or something isn't right here. In July, they put out a SPAC-like deck comparing their FRE multiple to much larger more established peers and includes some wild upside targets.
Small-cap BDC/credit managers haven't done particularly well in public markets despite the permanent capital angle, two that come immediately to mind are Fifth Street Asset Management (FSAM) and Medley Management (MDLY). Interested in hearing others thoughts, especially if you have a strong view on the future of Mount Logan. I own a bit, mostly hoping it trades well out of the gate, if not, there's some support from the tender offer (management has committed to not participating).
Disclosure: I own shares in TURN
Have you had the chance to talk to Kevin Rendino or Daniel Wolfe at TURN? They may explain a few of your concerns. Also what happens to the NOLs? Finally they will probably initiate a dividend. Appears very compelling and as you say a free look in theory.
ReplyDeleteI haven't. I know some investors that think highly of them, maybe I should be less skeptical, thanks.
DeleteDon't like this idea. It's crap merging with crap and the result will be more crap. Mount Logan has been going nowhere for about a decade since they emerged from a busted mining company in 2018.
ReplyDeleteAnd I'm sure Kevin Rendino is a genius but if he cared about shareholders he'd have liquidated TURN years ago. He took over in 2017, shareholder equity is down from $80m to ~$50m since then while he and his buddies siphoned off $2m / year in salaries. That alone is a 4% expense ratio already. And then he has the guts to complain in conference calls that his stock is trading at a 'ludicrous' 25% discount to NAV. Of course they never did more than a token buyback.
Imho the people involved here talk the talk but do not walk the walk. And of course everybody involved gets to keep their job post-merger. Maybe the stock pops in the short term given the tender and new listing but I'm skeptical about the long-term.
As for the comparables and numbers they're putting out there in their slide deck, well, what can I say. Comparing themselves to KKR and Apollo :) Would have been fun if they had also included a graph comparing KKR and APO shareholder returns versus TURN and MLC over the past years. It's just a giant stock promotion tour.
Are you aware that Kevin and Daniel were taking good chunks of their comp and buying stock? Guess not. Maybe it doesn't work, but they did a very good job of getting the company out of a big mess with all the Venture crap they had. Long term who knows but a short term pop can easily happen.
DeleteEquity don’t go from 80 to 50 but from the start but that would actually make you do math to know. There are no jobs for “.then” that have been made public. Also if you combine the 30 million in venture losses and normal operating expense there wouldn’t be a turn today with 50 million in cash. It’s also not a bdc. It’s an asset mgmt company. But that would require you to be intellectually honest
ReplyDeletehttps://www.sec.gov/Archives/edgar/data/893739/000089373925000072/a425filing-july15x180asfil.htm page 7: "expectation is that TURN management will join and expand public markets strategy for new MLC". No clue what that even means but it's not going to be a minimum wage job, I can tell you that.
Deletehttps://d1io3yog0oux5.cloudfront.net/_aa656ee8d1e9a18580c24e9f3abbaf58/180degreecapital/db/373/2910/call_slides/180+Degree+Capital+-+Q4+2024+Update+Slides.pdf
Apart from that, this sheet is pretty much all you need, slide 8. NAV was $7.02 about a decade ago. The legacy portfolio writedown over these years was $2.41 / share. NAV as of y/e 2024 was $4.64. Even excluding the legacy portfolio not a single dollar of value was created for shareholders during the enormous bull run of the last decade.
Yes, mr. Rendino bought a decent clip of shares (about $4.7m) since he became a CEO and that is the only thing I like here. But during that same period he also received $7.9m in compensation.
In any case I'm not going to debate the anonymous Kevins here :)
I can see the appeal of the short-term trade, nice shiny NASDAQ listing and they had to throw in a small tender offer to get the deal over the line. I hope it works out.
I think BC Partners is essentially trying to replicate what the big PE firms (KKR, Apollo, Blackstone) have done over the recent years: Switch from pure-play alternative asset managers (very sticky, predictable revenues from funds which the public markets like, but which are at risk to declining if they struggle to raise additional capital) to managers of permanent capital, esp. in the form of insurance. BC Partners is essentially building this from scratch, which ideally has benefits for the shareholders of MLC (i.e. they build various pools of permanent capital, i.e. by managing BDCs, CEFs, or long-term insurance capital), but of course also to BC Partners (more capital to manage for their own credit funds, on which they can charge fees). MLC sits somewhere in the middle, i.e. benefitting from being the manager of those pools of capital, but also as someone directed by BC Partners to buy their assets.
ReplyDeleteI think if the story plays out (and if BC Partners doesnt mess up the credit quality, which judging by PTMN etc. might be an issue) I think it can be a mini version of Apollo/Athene, and perhaps get taken private at some point by a larger GP looking to grow their assets under management.
If you want to read more into that business model, I recommend Red Deer (@excessdefaults on X). His blog is the best summary of that business model, and how it can work out well: https://reddeerinv.com/posts/
Thanks, I'll check out the blog. More curious why BC Partners needs/wants Mount Logan? I don't think they're being overly aggressive on the expense sharing arrangement. But why not have it all under the BC Partners umbrella and take BC Partners public?
DeleteThis is obviously more of a trade than a long term hold but fwiw the Mt Logan CEO pretty much blew up AINV with his credit calls years back.
ReplyDeletehttps://www.midcapfinancialic.com/insights-news/pressreleases/2016/06/apollo-investment-corporation-announces-senior-management-appointments