Description

Vertical Capital Income Fund (VCIF) is a closed-end fund managed by Oakline Advisors focused on residential mortgage whole loans.  A week ago, they announced they were pivoting strategies and managers hiring Carlyle to invest in debt and equity tranches of CLOs instead.  As part of this transaction, Carlyle is agreeing to pay $0.96 per share to shareholders in exchange for the ability to manage closed-end fund and has agreed to tender for $25mm worth of shares at NAV or better and has agreed to buy an equivalent amount of new issuance from the Company at NAV or better as well.  Carlyle will charge a base management fee of 1.75% plus 17.5% over an 8% hurdle rate, inline with peers as outlined further below. 

The main condition to closing appears to be shareholder approval, and they've announced the Company's four largest institutional holders (Relative Value Partners, Saba, Bulldog, and Almitas) who represent ~35% of shares outstanding are supportive of the transaction.

And it feels like there is good reason for those shareholders to be supportive.  VCIF has historically typically traded at an ~15% discount to NAV, whereas peers who invest in CLOs are currently trading at premiums.  

If the Company trades at NAV, a shareholder will get $0.96 as a special dividend from Carlyle, $2.41 from the tender (assuming everyone tenders and you get a pro-rata allocation).  Remaining NAV per share you are purchasing today will be worth $7.80 totaling $11.17 in consideration or 16% upside to today's price.  It's also possible that that VCIF trades at a premium to NAV inline with the comps presented above.  In the table below, I illustrate what would happen if they traded inline with the lowest premium in the space (ECC).  Note that all the comps have consistently traded at a premium to NAV over their publicly traded histories.  That said, you might also have some leakage from unwinding the whole loan business and transaction costs as it relates to the new CLO business, so I'm thinking NAV is the target exit.  

In the table below, I also show at the VCIF's 3-year average discount to NAV of 14% and what happens if you trade near the COVID low discounts (30%), which points to some nice asymmetric upside / downside, especially for a transaction that should be able to close relatively quickly.  

Note there is an argument not to tender your shares at NAV, if you really buy into the fact that VCIF could trade at a premium to comps.  I've laid that out in the above, but I personally would like to reduce my downside risk and tender, especially given you might see some short term NAV erosion related to transaction costs.

Finally, I'd just mention that I think it's an attractive time to be investing in CLO tranches, as that market has experienced significant spread widening in '22.  Not that I think I'll want / need to hold the vehicle long-term, but I guess what I am saying is that I don't think I'd punt out of it for below NAV even if it took a while to reach NAV, because I think the absolute returns in the CLO market are attractive right now.  

Catalyst

- Officially hire Carlyle 

- Tender complete