2025 end-of-year portfolio review

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The blog is on life support, but the annual tradition of a performance review is one I would not want to withhold from my readers. I know you are all curious, even though it is pointless to compare yourself to a random person on the internet. In 2025, the portfolio produced the worst return since the inception of this blog, but I can hardly complain. Fourteen years of double-digit positive returns has exceeded all my expectations from when I started this blog. It is also inevitable that at some point I will encounter a year that I truly can complain about, but this year is not yet it. Hopefully, that is still far away in the future!

Year Return* Benchmark** Difference
2012 18.44% 15.01% 3.43%
2013 53.38% 18.11% 35.26%
2014 30.11% 19.23% 10.88%
2015 24.23% 9.34% 14.89%
2016 64.97% 11.73% 53.24%
2017 29.04% 9.47% 19.57%
2018 13.07% -4.34% 17.41%
2019 32.34% 28.93% 2.70%
2020 19.31% 7.18% 12.13%
2021 31.31% 28.08% 3.23%
2022 11.63% -12.58% 24.21%
2023 10.47% 18.65% -8.18%
2024 31.20% 25.90% 5.30%
2025 10.17% 8.33% 1.84%
Cumulative 2511.42% 421.64% 2089.78%
CAGR 26.24% 12.52% 13.72%

* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) gross total return index in euro’s

In the performance attribution graph below, the special situations bucket managed to take its usual number one spot, but with the smallest margin since I started compiling these graphs. Garrett Motion was, and still is, one of my biggest positions, and combined with good operating results it really provided a big contribution to this year’s results.

All the way at the bottom, we find the impact of currency movements, which explains why this year felt a bit like swimming against the tide. I have a lot of exposure to US companies, and the US dollar lost a significant amount compared to the euro this quarter. The actual impact is probably even bigger than the graph shows, because for some brokers it is not feasible to calculate the impact of currency movements exactly. Together with some other positions, they are grouped together in the “misc. positions” basket, which provided a negative contribution to the portfolio despite containing, on average, profitable trades.

A lof of the names in the list above should be familiar to my readers. Next year, United Development Funding and PharmChem will no longer reappear because both have been acquired, but I still hold positions in all the other stocks.  This year’s newcomer – Wise plc – is not making a good first impression by claiming a spot at the bottom. Wise is a fintech that specializes in global money transfers. I have been a happy customer for years before initiating a position at the start of 2025.

Wise’s business is difficult to replicate. They operate in 160 countries, support 40 currencies, hold over 65 licenses worldwide, and have six direct connections to local payment systems. In regions without direct connections, they partner with local banks. What sets Wise apart is their focus on improving their product. Cost savings are passed directly to customers, to the point where my Wise cash balances now earn better interest rates than at Interactive Brokers. This customer-centric approach drives extremely high satisfaction, enabling Wise to pursue a growth strategy largely fueled by word-of-mouth referrals.

Since their IPO in London in 2021, Wise’s revenues have soared from £421 million to £1.278 billion, while net income has surged from £31 million to £387 million. The stock, with a P/E-ratio of 24, isn’t exactly cheap. But as long as they continue improving their product, it’s hard to envision a scenario where their customer base doesn’t keep growing – bringing higher revenues and earnings along with it. At the moment, however, the market is somewhat skeptical. The company continues to invest heavily in growth, putting pressure on earnings and margins. Next year the company plans to change its listing from the UK to the US in the hope to achieve a higher valuation multiple, but personally I don’t see that as a material change. It will still be the same business with exactly the same fundamental value.

I hope my readers had a good 2025 as well, and I would like to wish everybody a happy, healthy and prosperous 2026!

Disclosure

Author is long most of the stuff mentioned in the performance attribution graph

Kronos Bio: where did the money go?

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Biotech companies are a fertile hunting ground for the special situation investor. Many of them fail and undergo some form of corporate action (liquidation, reverse merger, bankruptcy…), or they are successful and get acquired. Most of them fail, but whatever the outcome, something always happens. But that something might not always be a positive event, and before that moment comes, they will usually burn cash like crazy with nothing to show for it. Last year Kronos Bio entered my radar when it announced a plan to “evaluate strategic alternatives”.

At the time the company had $124.9 million in cash, but was contending with a significant cash burn rate and large lease liabilities ($25.8 million present value). With a share price around $0.85 and market cap around ~$52 million it’s easy to see the attraction for special situations investors. That setup should offer plenty of room for some cash burn, get rid of the lease liabilities, and still generate a good return, right? Right?…

The Tang Capital Deal

After a couple of months of silence the company announced it would be acquired by Tang Capital for $0.57 in cash/share plus a contingent value right tied to a whole Christmas tree of different milestones. Tang Capital is basically involved in every busted biotech, and he often offers to buy the company at a not too big discount to net cash value, and share in the upside of the disposition of the (failed) clinical assets using a contingent value right.

The $0.57 in cash per share amounts to just $35 million, and was quite a disappointment. Not just for the entrepreneurial special situations investor, but also for the market in general because the stock dropped from ~$0.90 to ~$0.70 the day the deal was announced. So, what happened here? Where did all the cash go?

If we take the latest quarterly statement, filed a week after the merger agreement, we see the following balance sheet:In the six months between the start of the strategic review and the deal announcement, the cash balance dropped from $124.9 million to $99.7 million. Liabilities also decreased by about $10 million, and there were $3.7 million in costs related to an 83% reduction in workforce. That’s a lot of money down the drain, but at the same time nothing too unexpected happened. Adjusting for the changes in liabilities and the one-time restructuring expenses that results in a cash burn of less than $6 million per quarter, and with the 83% reduction in headcount the future cash burn is supposedly a lot lower. Note that this cash-burn figure doesn’t include the lease payments, because they result in lower liabilities on the balance sheet when paid (ignoring some net present value accounting movements).

So looking at this it’s still tough to see why the company is basically being acquired for $35 million plus some rights. A basic analysis would start with the latest cash balance, deduct all liabilities, make an adjustment for the lease liabilities to take the undiscounted value and add one quarter of cash burn until the merger closes. This gets us to the following estimate:

So, did Tang Capital simply get a very good deal? Are shareholders getting screwed? Why is this being sold for $0.57/share?

The contingent value rights

Of course, I haven’t started to discuss the CVR, and at first sight that one offers some hope of a recovery of the missing cash. The CVR has a total of four milestones, two of them related to the disposition proceeds of their clinical assets, one related to the (lease) liabilities and one that is especially of interest with regards to the missing cash question. Shareholders will get the right to get 100% of the Closing Net Cash (capitalized terms, because this is of course a carefully defined term in the merger agreement) above the cash balance of $40 million.

So a rough estimate would suggest that there should be $18 million of cash available above the $40 million threshold, and that could translate into ~$0.30/share of addition consideration. If you would have bought some shares to bet on this contingent payment I wouldn’t fault you, it is a thesis that makes sense, but something doesn’t quite add up. Why agree on a $35 million cash deal if there is no real question that the net cash is a lot higher?

Today, the tender offer statement was released, and it contained some interesting information. Because, surprise, surprise, the estimated payout of this specific milestone of the rights is not close to $0.30/share, but estimated between just $0.02 and $0.05/share. So we are back at our original question, where did the money go? Well, as I said, “Closing Net Cash” is of course a carefully defined term in the merger agreement, and it does not match the calculation above at all.

“Closing Net Cash” means, without duplication, (i) the Company’s cash and cash equivalents, restricted cash, and investments as of the Cash Determination Time, determined in accordance with GAAP, applied on a basis consistent with the Company’s application thereof in the Company’s consolidated financial statements, minus (ii) Indebtedness of the Company as of the Cash Determination Time, minus (iii) the Transaction Expenses, minus (iv) the Estimated Costs Post-Merger Closing, minus (v) $400,000 for the CVR Expense Cap under the CVR Agreement.

Besides some small differences, and not all negative, because here restricted cash is included in the calculation, the single item that should get you worried is called “Estimated Costs Post-Merger Closing”. In the merger agreement this is defined as following:

“Estimated Costs Post-Merger Closing” means all costs that the Surviving Corporation would incur post-Merger Closing, including costs associated with: (i) CMC Activities; (ii) clinical activities; (iii) remaining lease-related obligations (including rent, common area maintenance, property taxes and insurance); and (iv) an aggregate of $250,000 for any legal Proceedings and settlements.

Paying for the remaining lease obligations, sure, but apparently soon to be former shareholders are paying 100% for all future clinical activities and who knows how much money is budgeted for that? Schedule I, that should contain a pro-forma Closing Net Cash Calculation is strategically not publicly filed with the SEC. Current shareholders will be paying 100% of the costs to maximize the value of the preclinical assets, but will only receive 50% of the proceeds. And that is assuming they will receive anything, because if the assets are not sold in the first two years after the merger closes shareholders will get nothing. Does it make sense for Tang to sit on these assets two years to get all the proceeds? Probably not. I’m skeptical about the value of preclinical assets that failed their trails, but two year old failed assets must be even worse.

Finishing remarks

So where did the money go? I’m not sure. It certainly looks like Tang Capital got a good deal, but perhaps the reality inside the company was worse than expected. Tang Capital started with an offer of $0.95 per share, assuming at least $67.2 million in closing net cash, but that was quickly revised down to the current proposal after due diligence. It still doesn’t quite add up to me.

Perhaps it’s also related to the lease expenses. If we, for a moment, ignore the colossal stupidity of an early-stage biotech company signing an 11-year lease, there’s a curious liquidation analysis in the tender offer documents on page 23. Total lease expenses are estimated at $42.9 million, while the latest quarterly statement lists just a $30.8 million undiscounted liability. Once again, it doesn’t quite add up, but the $12 million difference is more or less what we are missing.

For investors who have confidence in the value of the preclinical assets, the stock might still be of interest. Tang Capital estimates the probability-weighted value of the CVR between $0.21 and $0.35 per share, while you can now effectively buy it for $0.13 per share. Potentially a good deal – but they’re not exactly a neutral party I’d rely on…

Disclosure

No real position, except some shares to track what happens.

2024 end-of-year portfolio review

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The performance review of 2023 is still featured on the blog’s front page, yet it’s already time to reflect on 2024. Over the past year, global stock markets marched relentlessly higher, driven by tech and AI stocks in the U.S. Despite having no exposure to AI, the portfolio not only kept pace with the MSCI All Country World Index but managed to outperform it once again. As the track record continues to grow, the power of compounding has become increasingly evident. While 2024’s performance was not significantly better than average, the absolute return was higher than the combined returns of the blog’s first six years – and those years included some of my best results! As investors, we are well-acquainted with the principles of compounding and exponential growth, yet it’s still remarkable to witness them in action.

Year Return* Benchmark** Difference
2012 18.44% 15.01% 3.43%
2013 53.38% 18.11% 35.26%
2014 30.11% 19.23% 10.88%
2015 24.23% 9.34% 14.89%
2016 64.97% 11.73% 53.24%
2017 29.04% 9.47% 19.57%
2018 13.07% -4.34% 17.41%
2019 32.34% 28.93% 2.70%
2020 19.31% 7.18% 12.13%
2021 31.31% 28.08% 3.23%
2022 11.63% -12.58% 24.21%
2023 10.47% 18.65% -8.18%
2024 31.20% 25.90% 5.30%
Cumulative 2270.45% 381.53% 1888.92%
CAGR 27.57% 12.85% 14.72%

* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) gross total return index in euro’s

As is visible in the performance attribution graph below, special situations were a driving force behind the performance of the portfolio. This isn’t a unique phenomenon, but this year the impact was even bigger than normal. One trade was especially successful, contributing 676bps to the overal performance. The impact of currency movements was also quite meaningful this year with a 341bps contribution, and in reality that number should be higher. I hold my investments in multiple brokerage accounts, and Interactive Brokers is the only broker that provides usable reports to determine the impact of currency movements. As a result, some positions include currency gains, while others don’t. And then there are some brokers that have such horrible reporting that contributing performance to individual positions is not feasible. That’s why last year I introduced the “misc. positions” item to deal with that. It is not a sneaky way to hide positions I’d prefer not to disclose, although I can’t guarantee I won’t use it for that purpose in the future.

Performance attribution graph 2024Another name at the top of the chart is United Development Funding IV. I’ve written about this fund before, and its story is far too complex to summarize briefly. However, with four former executives in jail and the SEC having revoked the stock’s registration statement, it’s safe to say this investment comes with some hair on it. Last year, NexPoint Advisors ran a proxy campaign to replace the current trustees, who remain tied to the jailed executives. Just before the first annual meeting in a decade, the company announced a deal to be acquired by Ready Capital (NYSE:RC) for up to $5.89 per share. While the timing of this deal raises questions – and it’s likely more favorable to insiders than it should – it still represents a substantial improvement over the previous status quo. Before the deal’s announcement, the stock last traded at $2.22 on ctt-auctions.com. Its most recent trade was at $3.75, and if the merger with Ready Capital closes
in 2025, there could be additional upside.

Although the final chapter of United Development Funding IV story has yet to be written, this appears to be another case of the old adage: good things come to those who buy (very) cheap. I began buying the stock in 2019 and 2020. Back then, I estimated the book value to be around $13 per share, though with considerable uncertainty since the company hadn’t published financials since 2015. Since my initial investment, the fund has distributed $1.50/share in dividends, reducing my cost basis to almost nothing. While the deal with Ready Capital values the fund at a steep discount to its current book value of $9.47/share, it’s clear this will result in a more than satisfactory internal rate of return.

I hope my readers had a good 2024 as well, and I would like to wish everybody a happy, healthy and prosperous 2025!

Disclosure

Author is long most of the stuff mentioned in the performance attribution graph

Sio Gene Therapies announces first liquidation distribution

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Almost a year ago I wrote about the pending liquidation of Sio Gene Therapies (OTCMKTS:SIOX) with the expectation that a first liquidation distribution would be made in a couple of months. It took a lot more time than initially estimated, apparently because it was more time consuming than expected to liquidate some of the foreign subsidiaries. But the long wait was worth it, because today we finally got a press release with a small surprise to the upside. The initial liquidation distribution will be $0.435/share while the company originally provided a range between $0.38 and $0.42/share. My guess is that we can thank the current interest rate environment for this bump in combination with the delay.

A key part of the investment thesis in Sio Gene Therapies was the expectation that after the initial liquidation distribution we could expect one or more additional distributions. The company is keeping $7.2 million as a contingency reserve, and in the initial proxy statement the possibility of distributing this money to shareholders wasn’t even mentioned. This could add up to $0.10/share, and in the latest press release at least they write something about distributing excess cash (subject to uncertainties inherent in winding up the business). Might take a couple of years or more, but I expect to get something at some point.

Disclosure

Author is long Sio Gene Therapies

Latitude Uranium merger arbitrage

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As someone reminded me today on Twitter, my blog hasn’t been very active recently, so I thought I change that a little bit with a new merger arbitrage idea to start off the new year. Last month Atha Energy (CNSX:SASK) announced that it would combine in a three-way merger with Latitude Uranium (CNSX:LUR) and 92 Energy (ASX:92E) to “create a leading uranium exploration company” (not my words). While I’m not exactly a fan of exploration stage mining companies it’s a merger that piqued my interest. It is semi-complicated with three small companies combining of which two are listed on an obscure stock exchange in Canada and the third in Australia to add a cross-border element to the mix.

As of this moment of writing the spread between Atha Energy and Latitude Uranium stands at 30.90%, which I think is excessively high for a merger that should face no real hurdles in closing. Part of the reason for the large spread is presumably the fact that the stock is trading on the Canadian Securities Exchange, and is not tradable for many people. You probably need an account with a Canadian brokerage firm, and for US-based investors there might be additional complications since these companies could potentially be considered PFICs.

Interactive Brokers for example does not support opening positions, although you can sell (but not short) shares that are listed there. I initially wrote here that the listing location idea was supported by the 92 Energy merger having a lower spread, but a reader pointed out my bad math on that one. The spread on the 92 Energy merger is actually even bigger at 48%! The Latitude Uranium acquisition is expected to be completed in the first quarter of 2024 while 92 Energy is scheduled to close early in the second quarter. So if you have an unhedged long position you might see the share price of Atha Energy cratering once all the former Latitude Uranium shares hit the market. But the bigger spread might be enough compensation for that risk. Didn’t buy a position in this part of the deal, but might also be interesting.

So we get a big spread, but it is certainly not without risks. If you enter the trade unhedged you might be exposed to wild price swings given the underlying type of business, and the possible selling pressure when the deal is done might collapse the spread before you can exit. As of this moment my broker is quoting a borrow fee of 7.75% for Atha Energy, which is actually quite doable given the large spread and the short expected timeline to deal completion. But there are no guarantees that borrow will remain available or that the borrow rate doesn’t spike, and you will need a lot of margin space to set-up this trade. The latter is definitely a problem for me, so I decided to enter the position unhedged. I realize that the outcome of this trade might be all over the place, but hopefully the large spread is isolating me from negative outcomes.

Overview from the transaction presentation

Disclosure

Author is long Latitude Uranium