KCAP Financial Targeted by an Activist; What the Smart Money Thinks about the Stock?

Dov Gertzulin and his team believe that the market has not fully priced in the potential and “true” intrinsic value of KCAP Financial Inc. (NASDAQ:KCAP), claiming that the company is not fully apprehended by most investors. In fact, the activist investment firm suggests that a potential sale of the entire company to another business development company, or a potential share buyback program, using the proceeds from the sale of particular assets, represent two alternatives that could maximize shareholder value.

Furthermore, DG Capital reckons that the shares of KCAP have greatly underperformed the broader market and its peers over past five-year period, mainly due to its “complex collection of assets”, which actually caused a restatement of the company’s financial results. To be more specific on that, the Audit Committee of KCAP’s Board decided earlier this year that some of the company’s previously-released financial results had to be rectified because of some errors related to its investment income from equity investments in CLO (i.e. collateralized loan obligation) funds and its dividend income. This announcement put even more downward pressure on the stock, which is allegedly trading at material discount compared to its peers.

We will now briefly discuss the company’s point of view regarding one of the alternatives proposed by DG Capital Management. On KCAP Financial’s second quarter earnings call, President and CEO Dayl W. Pearson asserted that the company had eschewed from implementing a share buyback program primarily due to leverage limitations, among other things. In fact, it appears that Carl Icahn shares the same point of view with the CEO regarding share buyback programs. The reputable activist investor recently stressed that this move is simply weakening companies’ balance sheets without providing any long-term benefits (read more details here). Going back to our case, Dayl Pearson and the company’s Board of Directors fear potential “unseen evens such as what happened in 2008”, so they prefer to sit on the company’s piles of cash rather than spend them on share buybacks.

Disclosure: None