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11/03/2009

Another Margin of Safety , MVC

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<< As another "margin of safety" play, consider MVC Capital , a business development company that specializes in acquisitions and financing of middle market companies. The market cap is $227 million, or $9.35 a share, against stated net asset value of more than $17 a share. In fact, management just this morning issued a release that the aggregate value of the fund's investments increased by $1.33 a share at the end of October.

MVC is not highly levered; its portfolio is nearly two-thirds equity and the shares currently yield 5.3%. Chairman and portfolio manager Michael Tokarz receives no salary and an incentive of 20% for any realized gains. At a nearly 50% discount to net asset value, this stock is trading at one of its largest discounts ever, and you can rest assured management is considering how to fix this discrepancy. MVC invests in old-economy businesses, many that have been around for decades.

The big risk of course, is taking management's assessment of NAV at face value. (If this company were trading at 20% of NAV, I probably wouldn't be writing about it.) Management owns more than 11% of outstanding shares, a small sign of alignment of incentives. The discount in NAV protects you from some unexpected adjustments. The dividend along with the fair pay structure gives management every incentive to grow the value of the business.

All investing entails risk. Focusing on the balance sheet can help eliminate a lot of that risk, but an investor's greatest margin of safety comes when a sound business chugs ahead with a functioning earnings engine >>

I have a position in MVC