Heliad Equity Partners is a publicly traded investment firm in Germany with a market cap of 37M Euro. I will make the argument that this is a great long-term investment under a stellar but young management team. However, as I will detail, it may be an even better short-term trade with 100% + upside potential within three months. I like the story for the former but at these prices, I think VIC members can profit from the latter.

Heliad is run by Andreas Lange, a mid 30s executive who is considered to be a rising star in the German private equity community (I would encourage members to run their own reference checks). Heliad started making investments in 2006, so given the typical private equity 3-5 year time frame there have been few exits to date. However, management plans to exit almost all of their current investments in 2009 and 2010, and the three exits to date have generated IRRs in excess of 25%. Furthermore, management is willing to provide detailed information on each portfolio investment although it is not in the annual reports. Even applying conservative valuation multiples indicates that Heliad will likely earn similar IRRs in much of the rest of their portfolio. Interestingly, German accounting regulations preclude Heliad from marking much of its portfolio up to fair market value given the recent vintage of the investments. As such, the company's stated net asset value is 1.20 Euro (current share price 0.53 Euro), but the actual FMV is my opinion is closer to 1.35 Euro. I could go through a sum of the parts in great detail and would be happy to do so in the Q&A. However, as I will get to later in the write-up, there is a much easier and more direct way to get comfortable on the valuation.

Assuming for now that 1.35 Euro per share is a conservative estimate of value, the long-term story is that you get a first-in-class mgmt team at nearly 33% of intrinsic value with a potential ability to compound at 20-30% IRRs for you going forward. It goes without saying that if they continue to deliver exits like they have, the company will soon trade at a premium to NAV as opposed to the current dramatic discount. The reason the company is cheap is that it's small and off-the-radar, and you have to do the work to value the portfolio by talking to the mgmt team and requesting portfolio company financials. Furthermore, all German financial stocks have come down in recent months, but Heliad employs very limited leverage either at the hold co level or at the portfolio company level. Virtually all its deals are equity only, and those few where leverage is employed it is obviously done on a non-recourse basis to Heliad the parent.

So what is the short-term thesis? Heliad management, being the value investors that they are, did not want to raise equity at these price levels, nor did they want to employ significant leverage. However, given what has happened to German small-caps, they are seeing great investment opportunities. As such, this past summer they sold half of their current portfolio to GreenPark Investments (a $2 billion London-based investment firm) at a valuation of 1.32 Euro. This means Heliad will receive nearly 0.65 per share in cash (minimal tax leakage). As such, an investor in Heliad now is acquiring the remaining 50% of Heliad's portfolio for significantly less than what will soon be Heliad's net cash position. Furthermore, the value of that 50% has been validated by a highly sophisticated investment firm paying 0.65 Euro for it after 6 months of due diligence. Bottom line: you are paying 0.53 cents for 0.65 cents of cash AND a portfolio of assets worth an additional 0.65 cents. To be clear, Heliad did not cherry pick some of its companies to sell but sold 50% of each and every one to GreenPark. This makes the above calculus more compelling in my opinion, as otherwise you would have to worry about which specific assets GreenPark bought and whether you thought GreenPark paid a fair price relative to the NAV for each one.

To make it even more compelling, this transaction has little deal risk. Of the 0.65 per share in cash to be paid by GreenPark, Heliad mgmt indicates they have received 0.50 already. The remaining 0.15 will be a receivable on Heliad’s balance sheet that is expected to be paid within 18 months. The 0.53 share price means this receivable is not needed for the thesis to work. However, the way it works is that as Heliad exits portfolio companies, the amount that would be GreenPark’s proceeds will be deducted from the receivable balance. So let’s say Heliad owns Company X which they sell later this year for 10M Euro. GreenPark owns 50% of this so they would stand to collect 5M Euro. However, as there currently is an approximately 12M Euro balance outstanding on the receivable, the 5M would be deducted from that and paid to Heliad. In summary, GreenPark structured the transaction to stretch out the timing of the payment and to reduce risk. I think there is very little chance that this 12M Euro balance is not collected, as the NAV of Heliad is currently 84M Euro which means GreenPark’s portion is 42M Euro.

The short-term thesis is that a) as the transaction increasingly shows up as cash on Heliad’s balance sheet when Heliad reports Q308 results and b) as management does a roadshow in the US (their first time) in late October, this type of gross valuation discrepancy cannot last no matter what the market environment is. Cash is king, and Heliad has plenty of it.