catalyst, delisting risk, intrinsic value, investment companies, Livermore Investments, MBO, NAV discount, Oddball Stocks, Owner-Operator, portfolio allocation, principal-agent problem, Richard Beddard, risk management, share buyback
Continued from here.
…We also have the elephant in the room – insider ownership! With the share buybacks, insiders now own 84.6% of Livermore! Gulp…
Jesus! Investors would normally be diving for the exits, at any price, based on the potential de-listing threat this represents… LIV’s actually defied this by marching ever higher. So much so, LIV was recently forced to announce they knew of no non-public reason for the sharp price increase (22% in a single day!). Was this sharp jump the drying up of supply in the face of share buybacks, an abrupt switch in market-maker/investor sentiment, or on the back of a genuine market rumour? Well, the takeover of an investment company by management is relatively rare… And an actual de-listing rumour usually seems to prompt selling, not buying, as it appears to terrify most investors…
But why? Richard Beddard’s written about this too – we had a good exchange in these comments. I think the risks of de-listing are probably over-stated. Yes, if you end up in a de-listing, you’re stuck with illiquid shares, you’ve no idea when intrinsic value will be realized, management may ignore or even oppress you, and there’s never enough info/newsflow… Just like most small listed company shareholders, really…
Even if you can live with them, you’ll probably only have 1 or 2 de-listings in your portfolio at a time. Which means you’ve got some v specific company bets, rather than a mini-portfolio of de-listings. My solution’s the same as I employ elsewhere in my portfolio – if certain holdings are illiquid, possibly riskier and/or less diversified, I simply mitigate those risks by reducing my stake size and/or demanding higher upside potential. Of course, this poses an interesting question, what about investment company de-listings?
I think they’re actually far superior to those of regular companies! Each investment company offers a mini-portfolio already. Even if investment objective(s) change after de-listing, the portfolio’s likely to remain diversified and, on average, returns will probably be no better or worse than before. Sure, maybe there’s less info/newsflow, and liquidity’s limited or delayed – but that sounds like plenty of mutual/open-ended funds to me, so what’s the big deal?! And, in most cases, investors hold investment companies for years – assuming decent fund(s), it’s an efficient out-sourcing of some/all of your portfolio management. So, if you’re likely to hold a fund for years, does it really matter if it’s listed, or unlisted..?
And I’d argue a fund de-listing should be viewed as a positive value catalyst. After de-listing, a regular company & its strategy may evolve v differently, but there’s really only one obvious objective for an investment company: To realize intrinsic value, as a single end-result, or on a periodic basis. Therefore, I believe a fund de-listing is far more palatable than one from a regular company – in light of likely value realization, it should probably even be embraced! If investors persist in selling shares on the back of de-listing news/rumours that’s really something to take advantage of..!
US investors may have the best of it – there are hundreds/even thousands of essentially de-listed US companies, but they retain an OTCBB/Pink Sheets price listing (albeit with possibly lousy volume). A majority are
rubbish garbage, but there’s plenty who are shareholder-friendly AND trade at absurd prices. This is a part of the investment world I should be focusing on more, damnit..! Nate over at Oddball Stocks has good NCAV posts, but his posts on ‘de-listed‘ stocks can be really intriguing.
But there’s another de-listing misconception I haven’t highlighted before – this time on management’s side. Management, as agents, dream of de-listings – ideally as Management Buy-Outs (MBOs). They crave absolute control, and even if they’re hazy on intrinsic value, they intuitively know when there’s a valuation gap to grab for themselves. A de-listing offers them control, the chance to pig out on compensation (in a regular company, excess comp’s a bit too obvious in a fund), and an MBO (even at a premium) offers them an eventual windfall between price and intrinsic value.
Actually, this touches on probably one of the biggest & most under-reported scandals out there: It’s pretty obvious some management teams deliver poor operating performance & shareholder value to deliberately drive down their share price… Only to swoop in & snap up the company at dirt-cheap prices, followed by an oh so rapid transformation in its fortunes! Controlling parents often do the same. It’s more common than you might think, and accounts for many value traps. If you invest in a stock because it’s cheap, or you’re hoping for a turn-around (‘no company can be that unlucky..!?’), I recommend you always consider this possibility first. I could name names here…er, I won’t! Guess that’s why this normally goes unreported..!
But let’s try ignore these greedy/fraudulent bastards – honest managers pursuing a genuine MBO are missing out for another reason. There’s actually a bigger prize, and it’s usually only owner-operators who are smart enough to grasp it. Let’s think about the options – you can:
- Delist: Now you can harvest the valuation gap (for you, and your minority shareholders) between the last market price & intrinsic value.
- MBO: You’ll likely have to pay a decent premium, which will reduce the valuation gap to be harvested. You capture all that gain for yourself, of course (no minority shareholders left), but you have to cough up the funds to buy them out – which increases your risk concentration & leverage.
But let’s consider an alternative:
- Share buybacks: Forget de-listings & MBOs – just commence an aggressive share buyback programme, where you opportunistically buy at a discount to intrinsic value. If the price remains static/declines, so what – just keep buying! If the price ultimately converges with intrinsic value – wonderful, you’ve realized the valuation gap. Either way, all purchases increase & consolidate your control. But there’s a key difference: Buybacks significantly enhance intrinsic value per share for you & other remaining shareholders – actively widening the valuation gap to be captured.
Oh, and let’s not forget: You don’t have to spend a penny of your own to realize this control & value – it’s all corporate cash!
Obviously buying back shares at escalating prices mitigates this, but (on average) I’d estimate this can offer the greatest potential return over time to owner-operators. Meanwhile, you increase control AND maintain your stock exchange listing. Who knows, you may even whip up enough investor excitement to flip your share price to a premium over intrinsic value! Then you can sell treasury shares, or issue new shares, and restart the whole cycle and/or expand your operations/portfolio! Or eventually there’s only a few minority shareholders left, and the valuation gap’s narrowed sufficiently, that it finally makes better sense to take them out at a premium & finish off your value realization in private.
I think it’s clear this is a perspective shared by LIV’s management, and they’ve applied it to great effect. And there’s still plenty of intrinsic value (i.e. NAV, in this case) to be captured/enhanced for their benefit through further share buybacks. If you’re a minority shareholder, you have a choice: Stay on-board & enjoy the same NAV enhancement, or fear a possible (eventual) de-listing & simply exit at a current 39% discount to NAV… Yes, I’ve halved my shareholding in response to the rapid price gains YTD but, considering all of the above, I’m v happy to keep enjoying the ride with my re-based stake. After all, the discount’s one of the larger investment company discounts around…
So what’s a Fair Value now? Well, my latest adjusted NAV’s an obvious choice (Note: No refresh on LIV’s portfolio/actual NAV until September’s interim results). But we could argue PE funds usually trade at a discount. Also, despite Swiss safe haven status, a property company with a 69%+ LTV ratio would likely be priced at a discount also in the market. However, in the current US credit environment, I see no such impact on the Credit Strategies component of LIV’s portfolio. This would suggest applying a discount to the Property & PE portion (i.e. 44%) of LIV’s portfolio. On average, over time, I’d say this discount could be fairly pegged around 30-35%.
Doing the math, this corresponds to (about) an overall 15% discount, which brings us to a 0.85 Price/Book Fair Value. Equivalent to $0.552, or a GBP 35.3p Fair Value per share – offering a 39% Upside Potential vs. the current GBP 25.5p share price. Actually, this probably understates Upside Potential, which would be enhanced by i) any further share buybacks (at a discount to NAV), ii) any NAV increases, based on income/capital gains (I won’t speculate on this, but note the v positive income tailwind highlighted previously), and iii) a value realization ‘event‘ would likely offer a share price premium, or even NAV.
I now hold a 3.0% portfolio stake in Livermore Investments (LIV:LN).
- Mkt Price: GBP 25.5p
- Mkt Cap: GBP 50.7 mio
- P/B: 0.61 (based on NAV adjusted for share buybacks)
- Tgt P/B: 0.85
- Fair Value: GBP 35.3p
- Upside Potential: 39%