Alluvial Capital Management, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 12.4% was delivered by the fund for the Q1 of 2021, outperforming the MSCI World Sm+MicroCap NR benchmark that delivered a 9.8% return, but below the Russell MicroCap TR and Russell 2000 TR index that had a 23.9% and 12.7% gains respectively for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Alluvial Capital Management, in their Q1 2021 investor letter, mentioned MMA Capital Holdings, Inc. (NASDAQ: MMAC), and shared their insights on the company. MMA Capital Holdings, Inc. is a Baltimore, Maryland-based holding company that currently has a $98 million market capitalization. Since the beginning of the year, MMAC delivered a -30.57% return, while its 12-month gains are down by -28.17%. As of April 30, 2021, the stock closed at $17.08 per share.
Here is what Alluvial Capital Management has to say about MMA Capital Holdings, Inc. in their Q1 2021 investor letter:
“Mistakes were made, and they were made by me. This quarter I sold all remaining shares of one of Alluvial’s longest-held companies, MMA Capital Holdings. We had owned shares in the fund since inception. Over the four years that Alluvial Fund owned MMA, we earned a total return right around 0%. Talk about opportunity cost! So, where did I go wrong? My fundamental error with MMA was a failure to reckon with a breakdown of the management incentive structure. Coming out of the Financial Crisis, MMA was a grab bag of disparate assets with little in the way of ongoing operations. Management, themselves large shareholders, did an extremely impressive job of selling off non-core assets, settling liabilities at discounts to carrying value, and buying back deeply discounted shares by the millions. Shareholders were treated to rapid increases in book value, and the stock followed suit. But that all changed in January 2018, when the company undertook a transaction to externalize its management structure. This should have been a sign for me, a sign with crimson letters flashing “SELL!” The stock market history of externally managed companies is littered with failures. Most trade at significant discounts to stated net asset value because investors rightly judge that external management is in itself a liability.
In an instant, MMA’s motivations changed. Where the company was once focused on optimization and maximizing value for shareholders, it was now focused on “building a platform” and maximizing its balance sheet (which would in turn maximize the stream of fees for its external managers.) Share buybacks slowed to a trickle even as the share price remained well below tangible book value. The company undertook an aggressive expansion of its solar construction lending platform and dedicated nearly all available capital to it. Still, I stuck around and endured years of slow progress and limited tangible book value growth.
My patience already wearing thin, I was troubled by some of the disclosure surrounding the company’s solar development loans in the third quarter 2020 report. Ultimately, I judged the disclosures to be a warning of trouble ahead, and I began selling shares soon after. I sold our last shares in early March, at prices averaging around $23. It hurt selling shares at such a steep discount to what I once saw as intrinsic value, but I had concluded that MMA’s intrinsic value and its possible economic outcomes had become too uncertain to assess with any confidence. It turned out to be a good decision, and auspiciously timed. At month’s end, MMA revealed it would suffer severe loan losses related to the Texas winter storm. Turns out MMA’s loan book is quite a bit riskier than investors had thought. Shares promptly dropped 20%. Would this all have happened without the external manager in place? Possibly. But the presence of a manager with goals and incentives at odds with those of other shareholders made it much more likely.
Though I managed to avoid the most recent insult the company delivered to shareholders, my investment in MMA was a bad one. Worse, it was a bad investment I allowed to go on for 4+ years, during which countless other opportunities sailed by. Every investor makes mistakes. The smarter ones make them quickly and then move on. I pledge to be more critical of worsening incentive structures and to change course more quickly when it becomes clear I am in the wrong.”
Our calculations show that MMA Capital Holdings, Inc. (NASDAQ: MMAC) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, MMA Capital Holdings, Inc. was in 5 hedge fund portfolios, compared to 3 funds in the third quarter. MMAC delivered a -28.30% return in the past 3 months.
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Disclosure: None. This article is originally published at Insider Monkey.