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AC- Associated Capital Group

LounginMKL

By LounginMKL
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LounginMKL Newbie

LounginMKL

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Found this opportunity through the latest [4Q15] Greenhaven Road Capital letter

 

Business:

AC is a recent spin off from GAMCO Investors, an investment advisory firm founded by the fame investor Mario Gabelli. Its operating businesses include an institutional research arm that generates ~$10M in annual revenue and 2 HFs employing merger-arbitrage and event-driven strategies with $1.08B AUM. The funds' fee structure is ~0.8% advisory fee plus incentive fee of 20% economic gain above a certain hurdle. Given funds' under performance in 2015, no incentive fee is earned and the advisory fee currently does not cover the compensation expenses. The operating loss is made up partly from gains from its proprietary trading that utilize aforementioned strategy. It ended 2015 around break-even.

 

Investment Thesis:

- AC carries a basket of liquid assets that are currently trading at 70% NAV, excluding operating businesses. [see attached]

- Plans to become a seeder fund.

- Continues AUM growth and performance improvement of its hedge fund business, pulling cash to the bottom line.

 

Many close-end funds have a perpetual discount to NAV. These funds tend to have similar characteristics- controlling operator (can’t liquidate to realize value), no catalysts, and high management fees (value drained by operator). Well, Mario Gabelli is majority owner and takes 10% of pre-tax profit per his employment agreement. I wonder if AC falls within this category...

NAVAC.xlsx

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Aman1 Newbie

Aman1

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I own a little bit of this - basically the BS discount to NAV as flagged. The performance of the merger arb fund (bulk of AUM in AC) is actually really impressive - the 10-12B form has the track record and most hedge funds would be proud of it. That said, the operating assets are a free option.

 

The main thing going for it from a management perspective is the decision to carry out a spin-off in the first place and subsequently announce a buyback. If management were really complacement about shareholder value, the easiest option would have been to keep all these assets sitting in GAMCO. My hope would be that they continue to buy back stock at a discount to NAV over time.

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SlowAppreciation Newbie

SlowAppreciation

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write-up on SA.  This guy is a good investor, small, but smart. 

 

http://seekingalpha.com/article/3962462-associated-capital-true-70-cent-dollar-trading-less-net-cash

 

Yeah Huber knows what he's doing. The Greenhaven Road letter tipped me off to AC and after doing my own due diligence I picked some up. And then after Huber wrote them up I knew I was in good company.

 

I did a little write up on my blog too. Will be interesting to see how this one plays out.

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lessthaniv Newbie

lessthaniv

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Two 8k's recently issued;

 

1) On August 9, 2016, GAMCO Investors, Inc. ("GAMCO") paid $20 million to Associated Capital Group, Inc. ("AC") to partially satisfy the $250 million AC 4% PIK Note (due November 30, 2020) ("AC PIK Note").  As agreed to between GAMCO and AC, this prepayment will be applied to GAMCO's principal repayment obligation due on November 30, 2016.  Accordingly, the principal amount due on that date has decreased from $50 million to $30 million and there remains $230 million in principal outstanding.  No other terms of the AC PIK Note have been changed as a result of this prepayment.

 

2) During the period August 12-17, 2016, GAMCO Investors, Inc. ("GAMCO") paid $120 million to Associated Capital Group, Inc. ("AC") to partially satisfy the $230 million AC 4% PIK Note (due November 30, 2020) ("AC PIK Note").  As agreed to between GAMCO and AC, this prepayment will extinguish GAMCO's $30 million principal repayment obligation due on November 30, 2016, $30 million of the $50 million principal repayment obligation due on November 30, 2017, $30 million of the $50 million principal repayment obligation due on November 30, 2018, and $30 million of the $50 million principal repayment obligation due on November 30, 2019.  Accordingly, there remains $110 million in principal outstanding, with $20 million due on November 30, 2017, 2018 and 2019 and $50 million due on November 30, 2020.  No other terms of the AC PIK Note have been changed as a result of this prepayment.

 

So $140M has been paid back already.

 

$140M/25.2M = $5.55 that will now show up in book value.

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SlowAppreciation Newbie

SlowAppreciation

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On December 30, 2016, Associated Capital Group, Inc. ("AC" or the "Company") entered into an agreement to purchase 926,345 shares of Class A common stock from an unaffiliated third party for $31.05 per share, or $28,763,012.25 in total.  The Company will treat the shares as treasury shares after the purchase.
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Scunny Bunny Newbie

Scunny Bunny

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AC is getting pretty fascinating.  The buyback of the 926,345 "A" shares reduces the outstanding number to 5,237,930. Of these Horizon Kinetics, a NYC based hedge fund (read their letters - I find them exceptional) own 1,190,206.  I assume that the buyback stock was bought from Frederick Mancheski himself (note: I could well be wrong and there are no filings yet) , but he has a trust which I reckon still has 569,270 shares.  So the "free float" of "A" shares is probably only around 3.45m at present or ~$120m. If you mark the 4.39m GAMCO common stock owned by AC to market at $33 and incorporate the buyback and recent dividend, it suggests the adjusted NAV to be around $40.05 (moving the GAMCO PIK Note to equity). Also of note is that GGCP (Gabelli) has recently acquired just over 500,000 "B" class shares taking their ownership of these to 98.6%. At $34, the "A" shares are a 15% discount to NAV, or ~30% if you do the calculation on an ex-cash/PIK note basis. These figures assume no value for the research and $1.25billion of alternative asset management. It would be good if the company disclosed more about its investment holdings given that in the last 10-K (a year old) $230m of the $330m of investments were "common stocks".  Maybe the discount is a bit skinny given you are totally under Gabelli's control (remember the Mancheski stock came about as a result of a settlement with Gabelli in May 2006 in relation to ownership of GGCP - google it), but remember the rationale for the spin out was to ascribe a value to the investments within GAMCO. Too many smart people around this stock for something not to happen, and with a constrained free float, lots of folks won't even look at it, which is why the value gaps are still there.

 

Disclosure: I am long AC.

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SnarkyPuppy Newbie

SnarkyPuppy

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AC is getting pretty fascinating.  The buyback of the 926,345 "A" shares reduces the outstanding number to 5,237,930. Of these Horizon Kinetics, a NYC based hedge fund (read their letters - I find them exceptional) own 1,190,206.  I assume that the buyback stock was bought from Frederick Mancheski himself (note: I could well be wrong and there are no filings yet) , but he has a trust which I reckon still has 569,270 shares.  So the "free float" of "A" shares is probably only around 3.45m at present or ~$120m. If you mark the 4.39m GAMCO common stock owned by AC to market at $33 and incorporate the buyback and recent dividend, it suggests the adjusted NAV to be around $40.05 (moving the GAMCO PIK Note to equity). Also of note is that GGCP (Gabelli) has recently acquired just over 500,000 "B" class shares taking their ownership of these to 98.6%. At $34, the "A" shares are a 15% discount to NAV, or ~30% if you do the calculation on an ex-cash/PIK note basis. These figures assume no value for the research and $1.25billion of alternative asset management. It would be good if the company disclosed more about its investment holdings given that in the last 10-K (a year old) $230m of the $330m of investments were "common stocks".  Maybe the discount is a bit skinny given you are totally under Gabelli's control (remember the Mancheski stock came about as a result of a settlement with Gabelli in May 2006 in relation to ownership of GGCP - google it), but remember the rationale for the spin out was to ascribe a value to the investments within GAMCO. Too many smart people around this stock for something not to happen, and with a constrained free float, lots of folks won't even look at it, which is why the value gaps are still there.

 

Disclosure: I am long AC.

 

Well said.  Argument could be made that a discount to liquid assets is warranted given the 10% pretax income fee that gets paid to management, but even if you consider this it is worth $37 at a minimum. 

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debtvulture Newbie

debtvulture

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Well looks like they will be able to collect an incentive fee this year.  Doesn't look like that is showing up in the financials yet? 

 

The problem I see with this idea is - what is the catalyst to shrink the discount to BV?  Mario has control of this through his supervoting shares.  He also takes 10% of the pretax profit.  Even if the manager makes a profit on the funds and is able to earn an incentive fee, you would think alot of that would go to the employees - otherwise they would jump ship.  So you are making a long term bet that AUM continues to climb and that makes the manager more valuable even though no income may flow down to the shareholders?

 

 

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SlowAppreciation Newbie

SlowAppreciation

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Well looks like they will be able to collect an incentive fee this year.  Doesn't look like that is showing up in the financials yet? 

 

The problem I see with this idea is - what is the catalyst to shrink the discount to BV?  Mario has control of this through his supervoting shares.  He also takes 10% of the pretax profit.  Even if the manager makes a profit on the funds and is able to earn an incentive fee, you would think alot of that would go to the employees - otherwise they would jump ship.  So you are making a long term bet that AUM continues to climb and that makes the manager more valuable even though no income may flow down to the shareholders?

 

The thesis doesn't really hinge on AC making a profit or not; instead, it's dependent upon the PIK note which doesn't show up as equity under GAAP. The note was supposed to be paid off over 5 years, but they accelerated it and I believe there is only $110m left. So as that happens, GAAP book will continue to shrink.

 

They also just bought back shares at $31.

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chesko182 Newbie

chesko182

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I just sold at 39.10 for a 30% return in 9 months, seems close enough to adjusted economic book value to justify the sell.

 

Very happy with the outcome, and happy to buy it again if it falls back to 30 or less.

 

Credits to Greenhaven Road and John Huber for the idea.

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SlowAppreciation Newbie

SlowAppreciation

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I just sold at 39.10 for a 30% return in 9 months, seems close enough to adjusted economic book value to justify the sell.

 

Very happy with the outcome, and happy to buy it again if it falls back to 30 or less.

 

Credits to Greenhaven Road and John Huber for the idea.

 

Yeah really great find. FWIW, Horizon Kinetics sees a little more to the AC story than just a realization of book value. From their Q4 2016 letter:

 

Associated Capital was spun out of Gabelli Asset Management (“GAMCO”) near year-end 2016 [sic]. It has two lines of business: institutional research (a mature, low-growth business dependent on brokerage commissions); and GAMCO’s alternative investments business, focusing on merger arbitrage and event-driven value strategies.

Although Associated has progressively increased its AUM, it still lacks sufficient scale to generate any meaningful net income. This is why it was spun off debt-free and with a substantial amount of liquidity: about $1.0 billion of capital, roughly 40% cash, 40% investments and 10% in a GAMCO note receivable. The company’s market capital- ization is only about $875 million, so it trades at about a 12% discount to NAV. In the simplest sense, this is an investment vehicle of the esteemed investor and controlling shareholder Mario Gabelli, who has repeatedly used spin-offs to isolate undervalued assets that can be expanded significantly.

 

As an investment manager with only $1.2 billion of AUM, the scale at which Associated can operate, if successful in gathering assets, can be enormously higher. As a manager of alternative strategies, it is well positioned, since these are becoming more attractive to asset allocators as prospective returns in conventional investments dimin- ish – arbitrage strategies are inherently low-volatility, which is an attractive attribute. Further, merger/arbitrage spreads are wider when interest rates are higher – they’ve been suppressed in recent years due to near zero interest rates – so Associated should be an earnings beneficiary of a rise in interest rates. Moreover, its strategies are eligible to earn performance fees. In essence, we believe Associated represents a low-risk, long-term call op- tion on an asset allocation shift toward alternative strategies, and it has the respected GAMCO value reputation behind it.

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Scunny Bunny Newbie

Scunny Bunny

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Horizon need to be bullish as they are locked in owing >20% of the Class A shares. Since we know they are no fools one assumes they have a bullish view of the specific investment management business and are happy with Gabelli control via the B shares & management agreement. The interesting bull case from here is that you still get the inv. management business for free (though it loses money) and that the free float keeps condensing. I am still there but fully accept that $38 is not as compelling as my first purchases <$30.

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