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Articles (43) 

Unique Opportunity Knocks With 180 Degree Capital

Multiple catalysts should narrow the discount and increase its NAV

April 04, 2017 | About:

The company's name was Harris and Harris Group operating as a BDC (business development company).

I posted my first thoughts on Jan. 12.

Then the company announced its final transition to a lower cost, shareholder friendlier and opportunistic close end fund structure with a new name (180 Degree Capital) and symbol. Additionally, noted value investor Kevin Rendino will lead the company as its CEO.

180 Degree Capital (TURN) invests and actively participates through constructive activism for small public and private companies with significant turnaround potential. The forward focus is investing in and actively assisting publicly traded companies while safeguarding and growing its existing active portfolio of 21 private companies. In addition, co-investment opportunities are now available at 180 Degree Capital. Shareholders and other accredited parties can co-invest alongside 180's best ideas.

180 Degree is a tiny company with seven full-time employees and one part-time employee as of Dec. 31, 2016. This structure concentrates management's operational impact. Equally important to its current intrinsic value is the net asset value (NAV) versus the current market price. Furthermore, impacting value is the CEO change, lower costs for reporting requirements, reduced head count and a new strategic focus. Reviewing only its SEC filings the prior team spent years destroying value with egregious compensation/benefits, excessive head count and a complete disregard for shareholders.

Let's start with Rendino. His specific comments on shareholder value creation are refreshing in sharp contrast to the behavior of its prior team's results.

Rendino is a successful 30-year practitioner of value investing in the tradition of Graham and Dodd. He spent 20 years at the Basic Value Fund (BlackRock/Merrill Lynch). Additional career information listed: Value team leader overseeing 11 funds and $13 billion in assets, ranked in top quartile and beat the competitor average and SPX by over 100 basis points for his entire money management career, received multiple Lipper awards for Investment Excellence, CEO at value shop RGJ Capital, board candidate at Lone Star Value small cap value fund, frequent contributor to the financial media.

The remaining key management members are critical to future shareholder value: Daniel B. Wolfe (Harvard Ph.D.); Blake Stevens, Ph.D. (Northwestern/Cornell) and Alexei A. Andreev, Ph.D. (Stamford MBA, Ph.D. from Moscow).

Their credentials and accomplishments are impressive in the world of STEM! And historically 180 Degree specifically leveraged their talents by investing and transforming private companies using their strategic, operational, management and the company's financial resources. These transformative companies are engaged in disruptive sciences, technology, precision health and medicine.

View the active portfolio.

180 Degree's resources will continue supporting the existing portfolio. But the new future investment objective is capital appreciation and current income from investments in deeply undervalued, small publicly traded companies where there are business and valuation benefits through constructive activism.

Current valuation

The stock price was $1.45 on March 31 versus the net asset value of $2.34 as of Dec. 31, 2016 per the PwC audited 10k. Hence, the discount on the NAV of 2.34 per share is 38% to get the current market value of $1.45. This compares favorably versus the average NAV discount during 2015 of 12.85%.

The current portfolio includes 21 privately held companies with meaningful future potential and two public companies.

Val.png

Insider activity and value institutional ownership:

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Catalysts

  • A public commitment to generate income and grow net asset value over shorter, more predictable time frames compared to historical results. In prior years, they invested in earlier stage companies that can take seven to 15 years to mature. The new focus is investment in undervalued small, publicly traded companies that can benefit from constructive activism.
  • Deep discount to its NAV of $2.34 was reported on Dec. 31, 2016. Exciting monetization opportunities exist with privately held long-time holding D-Wave Systems, publicly held Adesto Technologies (NASDAQ:IOTS) and other late-stage private companies to move the stock price closer to its NAV.
  • Internal talent to work with the invested company's management teams to grow these transformative science and engineering based technologies. New leadership to shepherd its valuable and many maturing private companies coupled with implementation of its new shareholder focus.
  • A lower cost strategy for increasing value for shareholders with reduced head count, beneficial cost structure partly from converting to closed end fund from a BDC.
  • New profit and capital potential created by offering accredited investors to co-invest alongside 180 Degree's most exciting companies.

Risks: Loss of key employees or a failed new strategic plan versus the cost to implement. A more capital constrained financial position versus historical conditions.

Disclosure: Long 180 Degree Capital.

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