Early in my micro-cap investing career I was drawn to public incubator/investment companies since they were basically doing what I was doing but on a larger scale. There are quite a few of these public investment companies around today that deploy their capital in the form of private equity and/or venture capital into emerging growth companies. Funding can come in the form of equity, debt, or a combination. Not only do these companies supply growth capital but they also provide strategic counsel moving forward. The key for these investment companies is just like you and I: Buy low, sell high, repeat.
The problem I’ve always had with these investment companies was their market cap rarely equaled the sum of the parts. They almost always trade at or below book value. The only time incubator/investment companies get far north of book value is when a bulk of their investments is in hyper-bullish growth companies and/or industries. An extreme example of this was during the Internet bubble when Safeguard Scientifics (SFE) and ICG Group (ICGE) both traded at several hundred dollars per share since they were mostly invested in tech/dot com companies.
As a full time micro cap investor I’m still drawn to this segment as a way to spot future trends (Where are they deploying capital?). Here is a list of micro cap (<$500m market cap) incubator/investment companies that I follow.
Safeguard Scientifics, PPS $16.20, Book Value Per Share $17.29: Safeguard Scientifics, Inc. was founded in 1953 and is based in Wayne, Pennsylvania with an additional office in Weston, Massachusetts. Safeguard Scientifics, Inc. is a private equity and venture capital firm specializing in expansion financing, growth capital, management buyout, recapitalization, industry consolidation, corporate spinout, and early stage financing transactions. The firm prefers to make investments in companies engaged in the technology and life sciences sectors. Within the technology sector, it invests in software as a service, technology enabled services, Internet/new media, financial services information technology, healthcare information technology and selected business services with capital requirements of up to $25 million. Within the life sciences sector, the firm invests in molecular and point-of-care diagnostics, medical devices, regenerative medicine, and specialty pharmaceuticals, and healthcare services. It invests throughout United States and Southeastern Canada. The firm primarily invests between $10 million and $25 million in growth equity financing and between $5 million and $10 million in early-stage financing. It typically invests in the capital structures including owner financed and bootstrapped companies, corporate division or business unit, and venture capital-backed seeking a growth partner. The firm prefers to be the largest shareholder in its portfolio companies, with ownership in the range of five percent to 50 percent. However, it may occasionally take a majority or smaller stake in its portfolio companies. It prefers to invest in companies having proprietary technology and intellectual property. 4 analysts cover SFE with an average price target of $24.
Acorn Energy (ACFN), PPS $4.78, Book Value Per Share $5.00 [Including recent $61m from sale of Coalogix]: Acorn Energy looks to invest in emerging technology companies that innovate and support energy infrastructure. Acorn companies' management teams typically own 10% or more of their business. ACFN recently sold one of its subsidiaries, CoaLogix, for $101 million ($61.8m proceeds to ACFN) which represented a 340% return on investment from a few years ago. I’ve spoken to CEO John Moore a couple of times, and I’ve always enjoyed his out of the box thinking. The company also just initiated a $0.035 quarterly dividend.
ICG Group, PPS $10.30, Book Value Per Share $6.40: ICG Group, Inc. was founded in March, 1996 and is based in Wayne, Pennsylvania. ICG Group, Inc. is a private equity and venture capital firm specializing in patient capital, growth capital, acquisitions, and mid and late venture investments in public and private companies. The firm seeks to invest in businesses involved in SaaS and technology enabled business process outsourcing, automating a complex workflow process, delivering comprehensive solutions including software, content data, and transactions, on-demand Internet software and services, Internet marketing or e-commerce, and service businesses including web enabled software platform. It also invests in business to business segment of the Internet industry. The firm typically invests between $10 million and $30 million and can evaluate deals up to $100 million. It seeks to invest in companies with minimum revenues $10 million, 20% to 30% CAGR, and positive EBITDA margin. The firm seeks to acquire a controlling and majority stake more than 50% or minority stake less than 20% in its portfolio companies. 2 analysts cover ICGE with an average price target of $17.50.
Capital Southwest Corp (CSWC), PPS $84.00, Book Value Per Share $140.00: Capital Southwest Corporation was founded in 1961 and is based in Dallas, Texas. Capital Southwest Corporation is a public investment firm specializing in venture capital and private equity investments in small and medium sized businesses. It does not invest in startups, publicly traded companies, real estate developments, project finance opportunities, oil and gas exploration businesses, troubled companies, turnarounds, and companies in which significant senior management is departing. The firm provides equity financing for expansion, growth capital, acquisition financings, management buyouts, and recapitalizations. It also provides capital to early stage companies. The firm invests in diverse industries across the United States with a focus on the Southwest, Southeast, Midwest and Mountain Regions. It seeks to invest between $5 million and $15 million and can co-invest up to $40 million. The firm prefers to invest in companies with revenues and enterprise values between $5 million and $100 million and an EBITDA between -$1 million and $10 million. It prefers to take long term position of 20 years in its portfolio companies and also acquires minority ownership stakes between 20 percent and 45 percent. The firm also provides follow-on financing. The company currently has no research coverage.
MCG Capital Corp (MCGC), PPS $4.55, Book Value Per Share $6.93: MCG Capital Corporation was founded in 1990 and is based in Arlington, Virginia. MCG Capital Corporation is a private equity firm specializing in investments in middle market companies. The firm does not prefer investments in highly cyclical and volatile industry sectors and businesses with significant volatility exposure. It seeks to invest in small to mid sized companies. The firm prefers to invest in acquisitions, growth financings, organic growth, recapitalization, and leveraged buyouts. It invests in companies based in the United States. The firm seeks to invest up to $75 million in debt and equity in companies having revenues between $20 million and $200 million and EBITDA between $3 million and $25 million. It seeks to invest in the form of senior debt, including amortizing, bullet maturity, term loans, and revolving credit facilities; institutional sub debt, including junior capital; second lien debt, that includes term loans on sole source and participant basis; secured and unsecured subordinate loans structured as current interest, deferred interest, and equity linked components; mezzanine debt and equity that includes minority equity investments. The firm may invest in minority or control equity positions. 5 analysts cover MCGC with an average price target of $6.00.
Kohlberg Capital Corp (KCAP), PPS $6.25, Book Value Per Share $8.52: Kohlberg Capital Corporation is a private equity and venture capital firm specializing in buyouts and mezzanine investments. It focuses on mature and middle market companies. The firm structures its investments through senior debt, second lien debt, secured and unsecured subordinated debt, mezzanine debt, and equity. It invests in all sectors except cyclical industries. The firm invests equity in both minority and control transactions alongside other equity investors. It invests through its own balance sheet. 3 analysts cover KCAP with an average price target of $8.00.