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New position: Steel Partners Holdings LP (SPLP)

May 8, 2012

I have to give credit where credit is due; thank you OTC Adventures for introducing me to Steel Partners Holdings LP (SPLP). I won’t go over the history and structure of the holding company and the various interests it owns in public and private companies as you can read about it directly in the original OTC Adventures blog post .

Last Thursday SPLP issued a letter to shareholders on the one year anniversary of its becoming a publicly traded company. The letter provides a business update and discloses a couple of interesting things that have happened since the beginning of the year, though it did NOT include an updated NAV per unit. First, the units were listed on the NYSE in early April; previously they had been listed on the OTC BB. Second, the holdings’ deferred management fee liability of $65 million payable to the manager in cash at the end of 2012 was instead paid off in April by issuing 6.4 million new units in the LP to the manager. The manager now owns over 34% of the LP units and, despite the somewhat too discounted price-per-unit (something like $10.15 vs. a market price of over $11.00) attributed to the new shares, management interests are now more alligned with those of unitholders than previously (they had 18% o the units previously). That’s a plus with a small minus attached; there was a negative impact to the NAV of the units from the transaction as the new units were issued at a price below NAV. Third, there were some asset purchases and rationalizing of assets between the portfolio companies during the past 4 months; Several oil/gas well drilling companies/assets were acquired by different affiliates within the portfolio, then the companies/assets were consolidated under Steel Excel (the shell of the old ADAPTEC), presumably upstreaming some cash from Steel Excel to the holding company for further investments.

My investment thesis for SPLP is rather simple. I bought units at about 70% of their net asset value and got the management of a very successful activist investor, Warren Lichtenstein, as part of the deal. The net asset value, in turn, is the sum of the the market value of public affiliate companies and estimated value of private holdings, preponderantly the former. What piqued my interest in Steel Partners Holdings was the list of their public investements; when I first read it I noted that I had previously considered purchasing shares in some of these public companies themselves, like Steel Excel, Cosign and GenCorp, as they appeared to me to be mispriced by Mr. Market. With SPLP I had a chance to purchase these same undervalued companies at a discount to market! Of course, there is the cost of the manager to be considered, as well as actions like the payment of the deferred fees in units at a discounted price. Those kind of things can be costly to an investor over the long run, but Mr. Lichtenstein’s track record of compounding asset values has been good and he has a considerable interest in the holding company now. There are clearly reasons why the units trade at a discount to NAV; there is the illiquidity of the units, small size of the market float and thus lack of institutional interest, as well as the opacity of the holding company’s structure. Will the discount shrink? That’s not my investment thesis. If it happens, great; if not I’ll be content with the assets compounding at 22%, the historical rate for at which WL compounded AUM between 1990 and 2007 according to an FT quote cited by OTC Adventures. That would be 22% on the NAV, so the rate of compounding on my investment would be even greater since I purchased the units at a discount to NAV.

As a reference, my quick and dirty NAV estimate for the units as of last Friday is $17.35. Take it with a grain of salt as my calculations are based on the limited information included in the update, so it could be off significantly from the true NAV. As always do your own due diligence.

  1. Jonathan permalink

    I invested in Steel for the same reasons. Do you have any concern about the issuance of the incentive units which is equal to 15 percent of the increase in capital? The amount is similar to a hedge fund but my concern is that Steel will trade at a discount to net asset value.

    You have a great blog.

  2. To be honest I haven’t yet read the Deferred Fee Agreement so I’m a bit in the dark on the details; it’s on my reading list. My level of concern depends on whether the deferred fee units are valued at NAV for the calculation of the number of units earned, i.e. 15% of the increase in NAV year-to-year divided by the NAV per unit, or whether the divisor is the market value. In the case of the latter, you’re right, the discount is worrisome as management has little incentive to try and reduce it; the larger the discount the greater the incentive fee. It would be kind of a creeping takeover. I expect certain shenanigans as this was, after all, a hedge fund, but I don’t think they would be that slimy. Or would they? I’ll try to check it out and get back to you.

    Thanks for the comment.

  3. Thanks, great blog. There is surprisingly little known about this company. Not a single 1 of the thousands of pundits at had an opinion about SPLP until today (after the markets open):

  4. Joyce Matthews permalink

    Lichstenstein is certainly not compounding NAV at anywhere near 22% annually. In fact, there seems to be zero growth since going public while the S&P has nearly doubled. Pathetic actually…

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