Description
NCEH is a neat and simple little situation. It has $0.21 per share in net cash (post acquisition cost), $9.5mln in NOLs, a top notch management (Chairman Mark E. Schwarz and CEO Steven J. Pully are Chairman and President respectively of hedge fund Newcastle Partners LP) with 25% equity ownership and a new business plan seemingly modeled off that of Affiliated Managers Group (AMG) which just hit an all time high on the NYSE and has a current P/E of 18.
On October 7, 2005 NCEH announced “that it intends to pursue a business plan of acquiring and investing in alternative asset management companies, including management companies of fund of funds that invest in hedge funds. New Century also announced that it has made an investment in Ascendant Capital Partners, a Berwyn, Pennsylvania-based asset management company whose funds have investments in long/short equity funds and which distributes its registered funds primarily through various financial intermediaries and related channels.
Steven Pully, Chief Executive Officer of New Century commented, "We are excited to begin our asset management business with an investment in Ascendant Capital Partners. Gary Shugrue, who leads Ascendant, brings an outstanding reputation and vast experience in the alternative investments arena, having developed and managed alternative investment products since 1988. Ascendant has an experienced research team and a unique set of investment products and distribution channels. We are also looking forward to completing other investments and acquisitions in the alternative asset management area and will focus on entities that are managing $50 million to $1 billion of assets. We believe that New Century will offer an attractive vehicle for owners of asset management businesses to monetize their ownership positions. Our approach will be to have principals in the firms that we invest in retain equity stakes, thereby serving as a powerful incentive for further growth and the preservation of the unique culture and environment that has led to past successes."
By purchasing interests in smaller managers at low earnings multiples, NCEH has a two-fold opportunity: 1. instant multiple expansion and 2. free upside as these management entities grows assets. Take little ‘ol Ascendant. It might have only modest assets today, but it is controlled by behemoth Turner Capital Partners and is certain to attract a larger asset base through their credibility, contacts and marketing muscle. NCEH paid $1.55mln (over 4 installments) for their investment in Ascendant to generate $120,000/yr in earnings. We believe management has pro forma-d forward earnings to create an acquisition multiple well below the AMG 18 P/E comp level.
This inaugural deal for NCEH also speaks to the prowess of the Newcastle team which is likely to repeat transactions with other star outfits. Also keep in mind that Newcastle is a large outfit. For them to spend great amounts of time on a $5mln investment means they are likely seeking far greater than average returns on their investment.
NCEH took a hit yesterday after its 10-Q was released. It could be related to NCEH’s one piece of hair - litigation. However, there is nothing new there – same “Legal Proceedings” comments as the last financial statements. On 8-11-04 a small individual investor filed a lawsuit against the company seeking to have a receiver appointed to liquidate the Company (which was the Company’s intention prior to Newcastle’s 25% equity investment at $0.26 – roughly the stated liquidating NAV). The complaint alleges that certain directors breached their fiduciary duties, including making certain payments to the former CEO. The Newcastle plan called for a halt to the liquidation plan in lieu of an NOL shell/acquisition initiative. The Company has spent $1.9mln defending itself ($500,000 out of pocket and $1.4mln booked as a receivable from the insurance co.). The policy covers the Company up to $5mln. Per the 10-Q, there exists a chance that exposure exceeds $5mln and that the insurance co. disclaims responsibility to pay. While it wouldn’t be prudent to disregard these issues, we doubt management would be proceeding with their plans if they believed this litigation had a decent chance of sticking or the insurance co. wasn’t ultimately liable.
Catalyst
Further acquisitions
Asset growth of management companies in portfolio
Litigation resolution