Chris Mayer has a lengthy ad out now for his Special Situations newsletter, and in it he teases a handful of different ideas, from Mongolia to spin-off investing to S&L conversions … but there was one particular pitch in the ad that caught my eye.
He says that he’s found a unique stock … and, well, it’s a short tease so I’ll just let you read it in his words:
“Edmonton, Alberta, isn’t the first place you’d look to find a sophisticated financial company. But that’s where I discovered one of the most extraordinary investment opportunities I’ve ever come upon-a company whose stock just goes up… and up… and up.
“This play has been on a 3½-year tear, from a low of $3.70 to current levels around $24-a more-than-sixfold gain.
“Oh yeah, and it pays 5%. It’s been paying dividends since January 2009. Monthly.
“This company claims a business model like no other. (I couldn’t disprove the claim, though I tried.) Like a mutual fund, it buys stock in other companies; unlike most mutual funds, it takes preferred, rather than common, shares. Like an REIT, it passes most investment income back to shareholders; unlike an REIT, it holds no real estate. Like a venture capitalist, it seeks out entrepreneurial firms; unlike a venture capitalist, it takes no role managing them.”
“It is invested in only eight companies currently. It doesn’t intend to ‘flip’ any of them. The master plan is simple: Sit tight, collect fat payouts and hang in for the long pull.
“And why not? Here’s a magic formula for safety and profit. If an enterprise falters, who gets paid first? Preferred shareholders. Furthermore, the hands-off management style lets this outfit run leaner than lean. We’re talking a half-billion-dollar firm with only seven employees.”
What’s not to like, right? It sounds a little bit like a business development company, a little bit like a closed-end mutual fund, a little bit like a royalty company … so what is it?
Well, it’s kind of a smushed together amalgam of all three — this is, sez the Mighty, Mighty Thinkolator, Alaris Royalty Corp (AD in Toronto, ALARF on the pink sheets).
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How does it match?
Well, Alaris is priced at around $24 and did hit a low of around $3.40 shortly after it started trading in early 2009, the path since that low has been almost a straight line up and to the right on the charts.
And they are a private equity investor with only eight portfolio (or “partner”) companies … and they are quite unique in the way they structure their deals. The funding they provide is backed by preferred equity, but their payout (royalties or dividends) from their partner companies is reset annually based on the top line (or near top line) revenue numbers — not on profitability or earnings. They focus on companies that they believe to be stable and growing, with low debt and low capital requirements, and their funding does not lead to a change of control or any issuance of new common equity (or even a seat on the board, or pressure on the company to change its strategy — Alaris is hands-off except for the setting of covenants for debt levels, etc.) … so it enables families or management teams to maintain control of their company while still getting meaningful financing for growth.
And yes, the dividend is currently right around 5% — and they do pay the dividend monthly, with increases at least once a year since that early 2009 swoon (that swoon came when they slashed the dividend, just as the market was in its death throes and reaching the lows of the crash). They aim for a very predictable and stable cash flow, since they know in advance what their distributions will be from their partners for the coming year, and they plan to pay out roughly 80% of that cash to shareholders.
And any reasons to suspect this isn’t a match? Well, not really — if there’s a similar company out there I haven’t found it … but Alaris is actually headquartered in Calgary. That doesn’t mean Mayer couldn’t have discovered them in Edmonton, of course.
Alaris’ partner companies are all North American, but that’s about all they have in common — there are a couple that are related to health care, a cement company, a wooden playground company, an aircraft maintenance firm, etc., you can see their profiles here if you like. And though they have only eight investments, they’ve made many more investments into those eight companies — many of their transactions are follow-on investments to fund companies who are already partners.
This is the first time I’d ever heard of this company, and I’ll admit to being interested in learning more — they do have a record, short though it is, of making each new investment accretive, with their “royalty” yield being large enough to offset any dilution from new Alaris shares or the cost of new debt (they don’t borrow a lot of money, since their goal is to be low-risk, but they do use debt as well as equity to grow), and I do like their lean structure. They say that they can double the size of their portfolio without overtaxing the current management team, which is good.
A 5% yield is not remarkable for a middle market investment company, and though performance should be pretty transparent and predictable for at least a year into the future there is a substantial amount of risk in being concentrated across such a small portfolio of partner companies — you need to be confident that Alaris is indeed finding stable, predictable partners because future revenue declines at these companies would eventually result in lower payments to Alaris, though they also do have the equivalent of a preferred senior equity position that protects them to at least some degree in the event of a bankruptcy or similarly adverse event.
So far this company does show at least some indication of being a bit more stable and predictable than some of the BDCs — when I look at them in more detail at some point in the future I’ll be comparing them to BDCs like Main Street Capital (MAIN), MVC Capital (MVC) and a few others that have caught my eye recently. I like the business model, I like the annual pre-set royalty payments from their partners, and I like their stated goal of stability, predictability and low volatility … don’t know if it’s actually “magic” as Mayer teases, but it’s certainly been working well for a couple years now.
That’s my initial look — sound like a company that’s interesting to you? Let us know what you think with a comment below.