Description

BKF Capital Group is a $14.3 billion asset management company trading at an adjusted enterprise value of approximately 1.3% of AUM. With the exception of Atalanta / Sosnoff Capital Corp. -- an interesting idea in its own right -- BKF is the smallest publicly traded asset manager that I am aware of. BKF's valuation is compelling, its balance sheet is resource rich, and its AUM have grown from $8.8 billion as of March 31, 2000 (following the company's restructuring) to $14.3 billion as of December 31, 2001.

John A. Levin & Co. was founded in 1982 as a value-oriented, institutional and high net worth asset manager. In 1996, Levin merged with Baker, Fentress & Company, an NYSE traded closed-end investment corporation. After trading at a consistent discount to net asset value, in January 2000 Baker Fentress liquidated its securities portfolio and dividended the proceeds to shareholders, along with its 80% ownership in Consolidated-Tomoka Land Co. Baker Fentress then changed its name to BKF Capital, and continues to operate John Levin & Co. In addition to the money management business, BKF also owns a broker-dealer through which it generates commission income.

John Levin & Co.'s performance has been well above average. Since 1986, a composite of Levin's investment results returned 865% vs.717% for the S&P 500 and 700% for the Russell 1000 Value Index. In 2000 and 2001, the Levin composite was up 15.4% and down 4.4%; the S&P 500 was down 9.1% and down 11.9%; and the Russell 1000 Value Index was up 7% and down 5.6%, respectively.

BKF's $14.3 billion in AUM as of December 31, 2001 is distributed among the following segments: $4.4 billion or 31% are wrap accounts; $3.8 billion or 27% are institutional accounts; $2.1 billion or 15% are sub-advisory accounts; $2.0 billion or 14% are high net worth accounts; and $1.9 billion or 13% are in investment partnerships. Levin started an event driven investment partnership in 1983, which comprises the bulk of the alternative assets, and also runs a short biased fund that was started in 1997. BKF has recently hired personnel to invest in distressed assets as part of the event driven strategy.

On a private market value basis, based on comparable transactions, I assume that BKF's wrap accounts are worth 1.5% of AUM, given their low margin economics (30-40 bps.) and high customer concentration among three institutions: Merrill Lynch, Salomon Smith Barney and UBS PaineWebber; the institutional and sub-advisory accounts are worth 2% of AUM; the high net worth accounts are worth 3% of AUM; and the private partnership assets are worth 4% of AUM. Using these estimates for the company's different segments, BKF's blended private market value is 2.25% of AUM, or $321 million.

With 7.4 million fully diluted shares outstanding, BKF has a $232 million market value of equity. As of December 31, 2001, BKF had cash, investments in its investment partnerships and investment advisory fees receivable of $90 million, offset by accrued bonuses of $38 million. Although money management businesses are not capital intensive and bonuses and other accrued compensation are paid at year end when advisory fees are received, I assume that BKF needs 5% of fiscal 2001 revenue or approximately $5 million in cash on hand to run its business. Given these assumptions, BKF's adjusted enterprise value is $185 million, or 1.3% of December 31, 2001 AUM -- $232 million market value of equity less $47 million in excess cash and investments. In fiscal 2001, BKF generated $18.7 million in free cash flow, defined as cash flow from operations, adding back the after-tax interest income on its excess cash, less $971,000 in capital expenditures. Quarter-to-quarter operating results have the potential to be volatile based on the performance based incentive fees that the investment partnerships generate, although BKF's event driven funds -- which employ risk arbitrage and convertible bond arbitrage strategies -- are not particularly volatile by hedge fund standards.

Catalyst

Continued growth in AUM, which will lead to improving margins (BKF's margins are currently well below industry average). Industry consolidation, driven by scale considerations.