If ever there was a sign that individual investors need protection from themselves, it may have shown up in Tuesday’s market action in Equus Total Return (EQS) shares. I have no position. Rarely do shares of a company trade higher on news that it is entering wealth destructive transactions. However that is exactly what occurred Tuesday with EQS shares trading higher by 5.7%. Investors paid up for the right to infuse additional capital into a Closed-End Fund with a transaction which would appear highly destructive to per share published Net Asset Value.
Monday Night, EQS announced a planned rights offering in which the company will issue new shares at a price of 10% below the average closing price of the Fund’s shares of common stock on the New York Stock Exchange for the eight consecutive trading days ending on the day prior to the Notice Date.
To say this governance decision may bonfire some per share assets may be quite the understatement. Eqqus closed Monday at a 46.73% discount to its published $4.28 cent Net Asset Value (“NAV”). It has long been a market valuation outlier in the Closed-End Fund space with market prices in the last year reflecting discounts from published NAV as high as 56.82%.
Why the market has historically devalued EQS shares is subject to subjective analysis. I will not be conducting any analysis on published Net Asset Values, nor discussing the history of EQS.
Per share wealth in EQS is unlikely to ever be unlocked by any activist to attempt to unlock. Management will always have an interest in the fees generated by the entity and EQS is a Business Development Company. While Karpus Investment Management has reported some stake, their Managing Director of Investments was quite candid in being interviewed for this piece. Cody Bartlett says Karpus was a buyer at roughly a 54% in arrears of a round of asset write downs. Further, Karpus has since been lightening the position around a 47% discount after further disappointments, including NAV performance.
Issuing new shares below published NAV, has a valuation gap and is a destructive transaction to published NAV. However, it would appear that individual investors Tuesday paid more for the right to participate in that transaction. Perhaps they have great comfort in what they are buying and the long term opportunity in EQS. Personally, I find it plenty interesting to observe the effect of Equus Total Return’s capital infusion event from the sidelines. I am not among those earning the management fees on increases in EQS’ published Assets Under Management (AUM), so I find my sidelines pass to be a relatively cozy seat.
The most recent EQS quarterly filing is available on Edgar. I have not read it in great detail and offer no comment as to its relevance. The document does offer EQS’ depiction of assets, liabilities and expenses. It also makes references to control, affiliate, and non-affiliate investments.
Disclosure: Dan Plettner has no position in EQS. Dan Plettner invests and receives income for securities research, including “buy-side” research. Dan licenses his own real time trading data to Covestor Ltd. (“Covestor”). Covestor is a Registered Investment Advisor that uses Dan Plettner’s data to create the Core, Closed-End Fund Activism Profile, Long Short Opportunistic, Pure Short Opportunistic, Tax Advantaged Income, Taxable Income, and MLP Direct Ownership models for its clients. Dan is not a Registered Investment Advisor, nor an employee of Covestor. Dan’s words should not be misconstrued as investment advice.