180 Diploma Capital (TURN) is a microcap (~$46MM market cap) closed finish fund (CEF) pursuing an activist technique in microcap shares. Earlier than 2017, a few of you may keep in mind the title, it was a enterprise capital fund referred to as Harris & Harris Inc (TINY). There are a number of related ones at this time, these nearly by no means work. CEO Kevin Rendino took over, modified the technique, however was hampered by their legacy enterprise portfolio weighting down general returns. The previous couple of years have been a troublesome time for microcap investing, massive caps appear to outperform yr in and yr out, but it surely’s particularly troublesome to outperform in case you’re working a subscale internally managed CEF. Bills create too excessive of a hurdle to justify a small fund’s existence.
I will skip some background however TURN trades at a reduction to NAV (not unusual for CEFs) and has for a while. Naturally activists confirmed up (Marlton Companions and others) and pushed the corporate to shut the low cost by repurchasing shares, liquidating and/or distributing the underlying public equities in TURN’s portfolio in-kind to shareholders. To administration’s credit score, TURN did implement a “Low cost Administration Program”, however to restricted success.
In January of this yr, TURN entered right into a reverse merger with non-public credit score supervisor, 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 probably suits the “steadiness sheet to earnings assertion transformation” theme the place the market is at present valuing TURN at a a number of of e-book worth and sooner or later will decide Mount Logan Capital on an earnings foundation. Marlton Companions pushed again on the transaction, there was even a counter proposal from one other CEF, Supply Capital (SOR), at NAV, however TURN rebuffed that deal. Shareholders on each side of the transaction have now authorised the reverse merger with Mount Logan Capital, which ought to shut someday this month.
Who’s Mount Logan Capital? It’s an affiliate of BC Companions, the place BC Companions credit score group’s government administration group additionally doubles as Mount Logan Capital’s administration group topic to an expense sharing settlement (so not fairly an externally managed firm). Mount Logan has a random assortment of low-quality asset administration contracts plus an owned insurance coverage firm the place they’re managing the float for a complete of $2.8B (the graphic is from final November), however that quantity is overrated a bit by the insurance coverage AUM and a pair run off administration mandates.
Supply: November 2024 Investor Presentation
It’s unclear to me why Mount Logan exists separate from BC Companions which has its personal credit score platform and the delineation between the 2 on future asset administration contracts. Administration owns some shares right here however probably not sufficient to prioritize Mount Logan or change into exceptionally wealthy whether it is profitable. The incentives are exhausting to tease out, which possible means they don’t seem to be properly aligned with outdoors minority shareholders. The connection with BC Companions is unusual, the 2 BDCs (PTMN and LRFC) not too long ago merged, LRFC was being managed by Mount Logan Capital and PTMN by Sierra Crest Funding Administration (a JV the place BC Companions is almost all proprietor, Mount Logan Capital held a minority stake), the mixed BDC was rebranded as BCP Funding Corp (BCIC) and might be managed by Sierra Crest. What is the level of Mount Logan?
Within the merger proxy, Mount Logan administration did put forth some fairly bold fee-related earnings projections that appears troublesome to attain:
If the 2026 numbers are to be believed, the $67.4MM valuation placed on Mount Logan within the merger (truly much less now that its been revised) is simply 3.5x FRE (closely adjusted) and would not depend the unfold earnings they obtain from the owned insurance coverage subsidiary. So both BC Companions is so determined to get Mount Logan off of a backwater Canadian change and onto the NASDAQ, or one thing is not proper right here. In July, they put out a SPAC-like deck evaluating their FRE a number of to a lot bigger extra established friends and contains some wild upside targets.
Fortunately, as a part of the revised merger settlement, new Mount Logan Capital (will commerce underneath the ticker MCLI) has agreed to a $15MM tender provide (presumably funded by liquidating TURN’s portfolio) after closing at NAV (~$5/share) for any shareholders that do not wish to go alongside for the experience. It is a bit of a free look to see if MCLI trades higher on a U.S. change. Moreover, they’ve dedicated to a $10MM share repurchase program post-tender provide to assist the inventory and supply liquidity.
Small-cap BDC/credit score managers have not executed significantly properly in public markets regardless of the everlasting capital angle, two that come instantly to thoughts are Fifth Avenue Asset Administration (FSAM) and Medley Administration (MDLY). Taken with listening to others ideas, particularly when you’ve got a powerful view on the way forward for Mount Logan. I personal a bit, principally hoping it trades properly out of the gate, if not, there’s some assist from the tender provide (administration has dedicated to not taking part).
Disclosure: I personal shares in TURN