Unique Opportunity Knocks with 180 Degree Capital (TURN)

The company's name was HARRIS and HARRIS GROUP (TINY) operating as a BDC (Business Development Company).
I posted my first TINY/TURN thoughts on 01/12/2017. http://bit.ly/2jhUwll
Then today the company announced its final transition to a lower cost, shareholder friendlier and opportunistic close end fund structure with the new name (180 Degree Capital.) and symbol TURN. Additionally, noted value investor Kevin Rendino will lead the company as its CEO. https://yhoo.it/2olfhA7

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 and actively assisting publicly traded companies while safeguarding and growing its existing active portfolio of 21 private companies(http://bit.ly/2nK2PHb). In addition, Co-Investment Opportunities are now available at 180 Degree Capital. Shareholders and other accredited parties can co-invest (http://bit.ly/2nuPZvg) alongside 180's best ideas.

180 Degree is a tiny company with 7 full time and 1 part time employee as of 12/31/16. This structure concentrates management's operational impact. Equally important to its current intrinsic value is the 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 their SEC filings the prior team spent years destroying value with egregious compensation/benefits, excessive head count, and a complete disregard of shareholders.

Let's start with the new CEO, Kevin Rendino. His specific comments on shareholder value creation is refreshing. Its in sharp contrast to the behavior of its prior team's results.
Rendino is a successful thirty year practitioner of value investing in the tradition of Graham and Dodd. He spent twenty 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 )http://bit.ly/2mZFS5D : BLAKE STEVENS Ph.D (Northwestern/Cornell) http://bit.ly/2nrONbc and ALEXEI A. ANDREEV Ph.D. (Stamford MBA, PHD from Moscow) http://bit.ly/2nv75cD.
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 http://bit.ly/2nK2PHb 
180 Degree's resources will continue supporting their 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:

Current Stock price on 03/31/17 was $1.45 versus the net asset value of $2.34 as of 12/31/2016  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 2 public companies. http://bit.ly/2nK2PHb

Insider activity and value institutional ownership:

A public commitment to generate income and grow net asset value over shorter, more predictable timeframes compared to historical results. In prior years, they invested in earlier stage companies that can take 7 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 reported on December 31, 2016. Exciting monetization opportunities exist with privately held long time holding D-Wave Systems http://bit.ly/2oqKwcT, publicly held (IOTS) http://bit.ly/2oOoJZ5 and others late stage private companies to move the stock price closer to its NAV .

Internal talent to work with 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. http://bit.ly/2nuPZvg

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.

Long: TURN


Fred said...

Hi John,

Thanks again for providing us a great investment opportunity.

After your post of Friday and a few weeks ago I've taken a closer look at this stock.

On first sight it has indeed an interesting discount and it has taken some important decisions on investment strategy and cost reductions.
Usually I would participate in the stock, however, I do have the following thoughts which currently hold me back:

- the company has a discount of 38%: that's not low, but for investment or holding co's not excessive either. With the decrease in value between 2015 and 2016, maybe that 38% might be appropriate?

- which brings me to concern Nr 2: what a terrible destruction of value in the past 5y!
Even though they've recruited a new CEO, the current board (responsible for the decisions in the last years) is still present. Are you convinced the new CEO will be able to act differently than the previous management?

- I think separating the portfolio and hale.life makes very good sense. But that means that the previous CEO (with terrible track record) remains in the group and is responsible for 1 important BU.
How can we be sure he won't destroy value at hale.life?

Just my first thoughts... I still consider take a first stake (mainly hoping that the new CEO will able to regain trust and decrease the applied

Best regards,


ShadowStock said...

Fred thanks for the comments!!

Fred, I agree that the historical management team were greedy scum to shareholders. It may take time to remove the guilty parties still on board. Who knows but that may occur when some of the private companies are sold. Since the board/insiders have no material ownership in the near future an outside activist can clean up the board.
I’m in the stock and hoping with Kevin’s connections at BlackRock the situation can quickly be fixed or at least improved.

Axster said...

Thank you for offering your smart value investing ideas through the years.
My neighbor is an intelligent long time techie who currently works for one of the most recognizable tech firms in the world. While that person has no interest whatsoever in investing, they know I invest and am always looking for ideas, big or small. Thinking of my kids, I asked what a #1 idea could be for (very) long term tech. The response I got was "quantum computing". I asked for any company names and D-Wave was noted as a leader. Thus, I am buying TURN and plan to continue to do so. Regards, Axster

ShadowStock said...

Axster, thanks for the kind words!!

Yes D-Wave is ALEXEI A. ANDREEV’s investment. Its now in its final stage.

"D-Wave Update: VW and Others Upgrading to Quantum Computing"


anomjd said...

Hi John,

Thanks so much for the post. I agree with your analysis, and guess what (you already know this of course), time proved you right so far.

I'm doing research on hard science publicly traded funds, and the Harris & Harris / 180 degree capital is a great study case.

Are you following other funds in the space? 2015 to early 2017 seems to have been brutal for the vast majority of them, with a few recovering ever so slightly in 2017. I wonder if you have any hypothesis as to why that might be the case.

Also curious to hear your thoughts on why are we seeing such large discounts vs NAV. My intuition is mostly lack of liquidity in underlying portfolio companies (long-term tech and science based companies), but maybe there's more to it I'm missing...