Sio Gene Therapies liquidation

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A liquidation that I have been tracking for a couple of months is Sio Gene Therapies Inc. (NASDAQ:SIOX). The company is a failed biotech that decided to wind-up operations and return the remaining cash to shareholders and yesterday they released the first preliminary proxy statement with an estimate of liquidation proceeds. Sio Gene Therapies estimates that their initial liquation distribution will be between $0.38/share and $0.42/share. With no directly obvious source of cash for a second distribution and a stock price at almost $0.41/share this doesn’t look very attractive, but I think it is. In the proxy statement we find this helpful table:

If you look at this you would think that the initial liquidation distribution is probably going to be their last one as well, since there is no cash leftover. But in the table, there is one line item that deserves closer scrutiny. A lot of money is “disappearing” in the reserve for potential or unanticipated claims and contingencies. When a company is liquidating it is mandatory to keep a reserve for a certain number of years (3 in most cases) in case unexpected claims show up. This is of course certainly possible. It could be as simple as the company missing some invoices in their administration or it could be worse with a full-blown lawsuit about Some Bad Thing in the past. But this is of course not expected to happen, and I think that shareholders should expect to get the majority of this reserve at the end of the liquidation process.

If we add back the full 7 million (low estimate) slash 6 million (high estimate) reserve back to the estimated cash the upside from the current share price is respectively 13.60% and 18.87%. The company is targeting to file their Certificate of Dissolution in April 2023 and process the initial liquidation distribution shortly thereafter. You don’t have to do any math to realize that this will result in an excellent internal rate of return. Of course, this fully depends on the release of their reserve for potential or unanticipated claims. But there is quite some margin for error here. I assume that the initial distribution will take place at the end of April 2023 and the final distribution 3 years later. In the low scenario we keep an IRR of 10.6% when 3.5 million of the reserve is used, and in the high scenario we can use the full 6.0 million reserve and still achieve a 12.7% IRR. I think that is an attractive bet, so I bought some shares.

Disclosure

Author is long Sio Gene Therapies

2022 end-of-year portfolio review

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I would not blame my readers if they thought that the Alpha Vulture blog had died, like so many other financial blogs before it. But after more than 10 years, it is still alive, if just barely, and with 2022 behind us it is time for the obligatory performance review. Throughout the years I have claimed that I expected my portfolio to do relative well in years of market turmoil, and 2022 is the first year that really proved it in the annual results. While the MSCI All Country World Index lost 12.58% the portfolio gained a respectable 11.63%. In absolute terms, the lowest return since I started this blog, but that is obviously still a really fantastic outcome. Given that I have a lot of readers from the US, it is important to realize that I measure my results in euro’s, and that the depreciating of the euro caused a significant currency conversion tailwind. In euro’s the MSCI ACWI was down “just” 12.58% while it lost 17.96% measured in dollars. I estimate that the currency conversion gains had a similar impact on my own results.

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%
Cumulative 1535.58% 222.35% 1313.23%
CAGR 28.92% 11.23% 17.70%

* 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

The basket of special situations saved the year for me with a more than 10% point positive contribution. The two biggest contributors inside that basket were Imara Inc and Twitter Inc. The latter is possibly the merger deal with the most media coverage ever, and I doubt there is anything that I can write here that you have not already read somewhere else. I think it was obvious to almost everybody that Elon Musk had a paper-thin legal case to get out of the merger, but the spread was huge because… well… Elon is Elon. If someone could pull a rabbit out of a hat it would probably have been him. Although that image might now be crumbling…

A bit more off the beaten path is the position in Imara. The company is a broken biotech that decided to wind-down operations. When I acquired the stock, it was trading significantly below net cash, pro-forma for a just announced asset sale, and I expected that they would liquidate and return the cash to shareholders. This did not happen, and instead they decided to go for a reverse merger with another biotech company. If I could have chosen in advance what the outcome would have been, I would have gone for the liquidation, but luckily the reverse merger plan was received well by the market, and the stock is now trading higher than the possible liquidation value. Sometimes you also need a bit of luck!

The other stocks in my portfolio performed somewhat mixed. Considering the overall performance of the global stock market, they performed relatively well, but as you can see, there are a couple of big losers and not many big winners. The biggest losers was United Development Funding that saw its share price go down 60%. ECC Capital fared even worse, and went down 88%, while Beximco Pharmaceuticals didn’t do much better with a minus 56%. What these names have in common is an absolute lack of liquidity. Even if I would have been able to foresee what would happen – which I did not – I don’t think I could have done much. With some stocks you can enter, but then just have to let the dice roll and see where you end up, because realistically there isn’t much more you can do after that point.

As a new years resolution I’m planning to increase my blogging frequency going forward. Given the incredible low bar I have set for myself in 2022 I’m confident that this is a new years resolution I can keep… I hope my readers had a good 2022 as well, and I would like to wish everybody a happy, healthy and prosperous 2023!

Disclosure

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

New Frontier Health completes going private transaction

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Yesterday New Frontier Health (NYSE:NFH) announced that the going private transaction was completed successfully. I wrote about the stock in August when it was trading at a 7.2% spread. I thought it was a deal without any hair on it, and it was indeed more or less completed without any hiccups. There was a small delay at the end, because when the company received shareholder approval more than 10% of the outstanding shares were demanding appraisal rights. Based on the press release it isn’t clear if this condition was waived, or if some holders agreed to withdraw their appraisal demands. But I don’t think it is a big surprise that this issue was resolved. The funds or individuals seeking appraisal rights have nothing to gain if the merger doesn’t go through, and my assumption is always that insiders are getting a good deal, so everybody involved has a good incentive to figure out a solution.

Disclosure

Since I haven’t received the cash yet, still long NFH

2021 end-of-year review, 10 years of compounding at 30%

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With 2021 behind us the blog hit a big milestone: the 10 year track record. Since I started the blog the portfolio has managed to grow annually at a >30% rate while beating the benchmark every single year. Truly amazing results, especially since I think it was achieved without taking excessive risks. The portfolio is usually pretty diversified with more than 50 positions at a time, has a low beta compared to the market and has more often than not a net cash position.

Sadly, I don’t think these results will continue. Some reversion to the mean is inevitable, and with a growing portfolio it is increasingly harder to allocate money to high alpha ideas. It is probably already telling that the returns of the first five years were higher than those of the last five years. If I would be smart I would now finish the blog and forever market myself als the “10 years of 30% guy” or something like that (maybe it would need something a bit more catchy), but I won’t. I want to continue to chronicle my journey as an investor on this blog, and when (not if) the inevitable bad year(s) arrive you will be able to read all the ugly details. But hopefully those are still far away!

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%
Cumulative 1365.14% 268.74% 1096.41%
CAGR 30.79% 13.94% 16.86%

* 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 past 10 years I have made several small changes in how I track my performance. One that I made several years ago is to take into account the tax credits that I receive when dividend withholding taxes are deducted from my brokerage accounts. Given that I can use most of the dividend withholding taxes as a tax credit I think the gross return index is a better benchmark than the net return index that I was using until this point in time. Obviously, this makes beating the benchmark a bit tougher since the gross return index is consistently a half percentage point higher than the net return index.

As usual, I made a performance attribution graph that shows how various positions contributed to the overal result of the year. Interesting for the curious readers, but also a helpful exercise for myself. With assets scattered around multiple brokerage accounts you never know how things exactly went until you put it all together in a spreadsheet. As you can see, the basket of special situations was, once again, a driving force behind the performance of the portfolio. Foreign currency exposure provided a big tailwind this year as well, as did my position in United Development Funding IV. The stock is being market at $1.40 by Interactive Brokers, but on cttauctions.com the last traded price is $6.26/share and I’m using that for my internal valuation.

If we would look inside the special situations bucket we would find a couple of big winners, a lot of small winners, but also some losers. My position in the Luby’s liquidation has gone better than expected, and is responsible for 339bps of performance in 2021. I bought the stock in 2020 for $1.70/share, they paid a $2.00/share liquidation distribution in 2021, and the remaining net asset value stands at $2.89 (and is presumably still a bit understated).

The second biggest winner in the basket with a 317bps contribution are the Garrett Motion preferred shares that got issued in the chapter 11 reorganization. The “easy” money in this stock has been made, but I think the preferred shares are still undervalued compared to the common shares. With a mandatory conversion very probable in less than two years time I’m happy to hold on to see how the story plays out. The biggest losers in the special situations basket are two liquidations that are not yet playing out as planned, SandRidge Mississippian Trust I (SDTTU) and SHL Holdings (SYCRF). I have had good results with liquidations in the past years, but as illustrated by this pair, they are certainly not sure bets. But for one performer like Luby’s you can have many duds and still come out comfortably ahead. 

I hope my readers had a great 2021 as well, and I would like to wish everybody a happy, healthy and prosperous 2022.

Disclosure

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

EXFO shareholders approve going private transaction

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Two days ago I wrote about the EXFO (NASDAQ:EXFO) going private transaction that had as biggest risk the potential that minority shareholders could block the transaction. I thought that it was more or less a done deal after the chairman bumped the price by a token amount, and got support from ISS and some of the biggest minority shareholders. Nevertheless, I would have expected a decent amount of grumpy shareholders to vote against the deal. But apparently even I was too pessimistic about that. In the end just 66.8% of the outstanding subordinate shares voted at the meeting, and the deal was overwhelmingly approved with 91% of the votes cast in favor. I would never call investing easy, but sometimes it can certainly look like that!

Disclosure

Author is long EXFO