Special situation: The WP Stewart rights

Note: Before I begin I want to direct your attention to OTCAdventures.com, the author has posted his big reveal recently.  Dave is stepping off the corporate treadmill to start his own asset management firm.   Dave has an eye for undiscovered investments, he loves the micro-cap stuff, but will invest in anything at an attractive valuation.  We try to get together fairly often and talk stocks over a coffee or a beer.  Every time we get together he's impressed me with his picks.  If you're looking for a manager it's worth a phone call or an email to see if the relationship would be a good fit.

Background

WP Stewart (WPSL) is an asset management firm founded by Bill P. Stewart in 1974.  The fund manages a number of concentrated growth strategies across domestic and international markets.  The company notes they are a researched focused investment advisor.  They manage money for high net worth individuals and institutions, both through their own mutual funds and separate accounts.

The company hit an extremely rough patch starting in 2007 that continues to persist to the present. Assets under management fell from $9.3b in 2004 to a low of $1.4b in 2008, and have since recovered to $1.6b.  Along with falling assets the company's earnings have fallen as well.


The company went from earning $13.87 a share in 2004 to trading for $12 a share in 2013.

Asset management is a brand business.  Investors invest in an asset management firm, and a manager.  Managers with the absolute best performance don't always attract the most assets.  Managers and firms that can tell a convincing story attract assets.  To the investing public, who is mostly ignorant of how investing works they would rather hear that their fund manager is investing in exciting biotech startups in Taiwan, not told dryly that the fund beat the MSCI Asia-Pacific ex-Japan index by 200bps.

The influence of marketing and branding results in managers touting ideas on CNBC non-stop.  The financial press is happy to fill their pages with profiles of popular fund managers.  After all, it's much more profitable for a fund to manage $1b and match the index, rather than manage $100m and earn 20% a year.  

For the massive outflows that WP Stewart has experienced their funds haven't done all that bad.  The company's US Growth and Composite Growth have edged out the index, while their two other strategies have underperformed.


Compare the company's fund results with their AUM figures above.  While the funds have done anywhere between 3.8%-10.7% annual over the past five years AUM has barely budged, which means that clients have continued to withdrawal money since 2008, negating the performance of the funds.

The opportunity

In the midst of the company's AUM and earnings decline a press release was published recently announcing a sale of the company to AllianceBernstein, a well known asset manager with $444b in AUM.  For AllianceBernstein the WP Stewart transaction won't even add 1% to their AUM.

AllianceBernstein is purchasing WP Stewart for $12 a share in cash, plus a transferable contingent value right for each share owned.  The stock is currently trading at $12.07.  The right is a fascinating little security, if WP Stewart can grow AUM to $5b within three years of the sale close date right holders will receive $4 per right.  If the company's AUM fails to reach that point shareholders will receive nothing.

Based on the current price someone who buys today will receive their initial $12 in capital back within six months and receive a right effectively cost $.07.  The right is probably worth a little more if we estimate that the shares aren't worth $12 yet, with six months left in the deal maybe they're worth $11.80, in which case the right is being valued at $.27 apiece.

It's hard to know if the rights are cheap or expensive because they rely on a binary outcome from an event three years in the future.  But just because we don't know the future doesn't mean we can't take a stab at estimating if they'll pay out or not.  The entirety of this investment hinges on whether the company can more than double their assets in three years.

While I don't have any idea on where AUM will be in three years, I do have some general thoughts which might help lead to an answer.

The first is that at fiscal year end 2012 the company had $1.642b in AUM, and when they issued their press release on the sale they stated that they have $2b in AUM.  Maybe the PR department rounded up their AUM, but it seems strange that they'd do that.  Rather it's plausible that the company grew AUM by 20% in the first eight months of the year.  If they can continue this pace they will have no problem meeting their goal.

The second thought is the company has experience running large sums of money.  Some funds have problems scaling their strategy when assets rise which could lead to underperformance.  The fact that WP Stewart has managed $9b in the past is encouraging.

The final thought is that the AllianceBernstein brand might help them raise capital as well.  It's possible investors were worried about the viability of the fund, but with the AllianceBernstein name slapped on it their fears would disappear.  It's also possible that expanded distribution through AllianceBernstein's network could lead to an increase in assets as well.

The bottom line for me is I have no idea if the company's growth goal is realistic, maybe it's an easy target and the rights are free money.  Or maybe the rights are akin to a lottery ticket.  At worst for a buyer today the rights are a $.07 lottery ticket.  If they pay off at $4 investors would receive 57x their current value.

Disclosure: No position

14 comments:

  1. Love CVRs. I've never seen a current example that wasn't attached to a biotech company. Hopefully the market will give us the opportunity to buy at at least break even.

    As an aside here is a website for a couple mutual-to-stock conversions: https://allocations.kbw.com/

    I have no real life experience with mutual-to-stock conversions so I was wondering if anyone could give me some pointers...

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    1. Seth Klarman's Margin of Safety has a chapter dedicated on it. It has all the conceptual details you need to get your bearings, but the book was published in 1991 and has never been updated, so it won't contain the latest and greatest information.

      Btw, a large part of the reason why thrift conversions were so undervalued in the late 1980's was because the sector was so out-of-favor due to the S&L crisis. The combination of the usual mutual-to-stock IPO price discount to book value + depressed book values = potential for 100% gains over the course of 1-3 years.

      Similar story in the late 1990's, but that time due to a different dynamic -- institutional investors' rate-of-return requirements were so high because they had to keep up with the indices, who were appreciating far above fair value due to the Tech & Telecom bubbles. Thrift conversions in this time frame also gave investors the potential for a 100% gain over the course of 1-3 years.

      In my opinion, you don't have the same out-of-favor asset class today in S&L's / banks / insurance given that it's now ~5 years after the GFC.

      It would be good practice for you to learn the basics of the conversions though, so you can buy when these assets go back out-of-favor (as I know they will, eventually).

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    2. Very well aware of conversions, very active, also very tight lipped. The Klarman book is a good start.

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  2. Interesting situation. Is there a reason why you are not invested?

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    1. If I do decide to invest in this I'd rather buy the right outright rather than buy the share and wait for the right.

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  3. Couple of rights offerings: kfsvf... BH/RT... Both rights seem to be strategic maneuvers for Stilwell and for Biglari . The kingsway financial deal is kind of complicated: it's a rights offering for a unit that consists of common stock as well as series A and B warrants. It makes me wonder what Stilwell is exactly planning. Any thoughts would be interesting thanks.

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  4. What if you sold short the same number of share you purchase, hedging the risk of the transaction not closing? The big assumption is you can short this stock.

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  5. The growth in assets needed to get to $5MM is pretty robust. They have essentially grown in line with US equity market this year. Do you want to bet that this rate of advance will continue for the next 3 years? Alliance has a lot of ability to influence the growth rate of assets. They can direct marketing dollars elsewhere, they can tell their sales force to push AB branded products rather than WPSL. They don't even have to do very much of it since it is a binary all or nothing option. So if assets are at 4.5B with six months to go, they can just lay off marketing for the second half of the year. Hard to police this sort of thing.

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  6. uh oh: http://www.nycdiaries.com/tales-of-a-nyc-sugar-daddy/wp-stewart-pops-and-robbers.html

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  7. Anyone know what the ticker symbol is for the WPSL rights?

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  8. What is the symbol for these?

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  9. Anyone know where you can find info on these funds?

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  10. The WPSL rights do not trade and, as I understand it, will not trade. They will either be worth $4.00 each or zero at the end of the three-year period, depending on whether the assets under management attributable to W.P. Stewart reaches the specified $5 billion threshold. AllianceBernstein publishes the AUM attributable to W.P. Stewart each quarter.

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  11. 11 days until expiration (12/12/16)...latest AUM at 9/30/16 was $4.4billion. Up $400mm from 6/30/16. Market up since election...nail biting time.

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