Equus Total Return Is Still Being Left In Limbo By MVC Capital

| About: Equus Total (EQS)

Summary

The agreement between EQS and MVC entered into in 2014 is still unconsumated with EQS sitting with half its assets in cash and simply waiting.

Neither EQS nor MVC seem willing to update the shareholders on the status of the merger/reorganization which still remains a big secret.

EQS is still very cheap and a great value for the price, selling at half book value, half its assets in cash and a large tax loss.

Equus Total Return, Inc. (NYSE:EQS) is one of the oldest publicly owned private equity firms and is based in Texas. It is a Business Development Corporation (BDC) which trades as a closed end fund. I have written about it before. They had a history of success before encountering stagnation and disappointments. Fresh management came into the picture and attempted to reinvigorate the firm. Unfortunately the timing was off.

In 2011, EQS elected to allocate resources to establishing a portfolio of oil and gas properties. The portfolio was diversified including producing, non-producing and exploratory. Half the portfolio is managed by Chevron (NYSE:CVX). Unfortunately the market did not go their way with their investment being completed shortly before the collapse of energy prices. Even with the present low level of oil prices, the portfolio loses money but is not a disaster.

In 2014, the new management made another decisive effort to change the direction of EQS. At that time EQS had a very substantial tax loss and was selling substantially below its net asset value. It sought to merge or reorganize within the framework of a larger BDC. They entered into an agreement with MVC Capital, Inc, (NYSE:MVC), a much larger BDC based in Purchase, New York, seeking to grow and expand. Under the terms of the agreement they exchanged stock with EQS obtaining 1.8% of MVC, while MVC obtained 35% of the much smaller EQS.

Time has passed and EQS in apparent reliance on the agreement has proceeded to liquidate its investments and now holds approximately $19,000,000 in cash which is roughly 50% of its net asset value. Its other assets are its investment in MVC, its portfolio of oil and gas properties and a minority investment in PalletOne. PalletOne is a very successful private company which manufactures and distributes wooden pallets for construction and transportation. With a minority investment in a private company, even though a very successful one, EQS's investment is totally illiquid.

At present, EQS trades at roughly half its net asset value and slightly above its cash in the bank. Its substantial tax loss of about $17,000,000 starts to expire in 2017. I have been unable to obtain a copy of the 2014 agreement with MVC and the status of the merger/reorganization remains a mystery. I did speak with a spokeswoman at EQS who told me that anything she said about the merger would be "inside" information. I also spoke with a spokeswoman from MVC who was more cooperative and told me that they were still working on it and that the 2014 agreement was still a work in progress. It also seems that MVC has some minor accounting issues which have precluded it from being in full compliance with the New York Stock Exchange.

This unfortunate situation, has been doing substantial damage to EQS shareholders as they are sitting on a portfolio which is half cash while incurring substantial management fees which are diminishing the assets. Based on market price, EQS has management costs which exceed by magnitudes the normal operating costs of a closed end fund which should be 1.5% to 2%.

I have attempted to offer a humble solution which would relieve MVC of its obligations, which it apparently does not wish to or cannot fulfill, while at the same time making use of the accumulated cash which is dead in the water. I have written the following two letters to the Board of Directors, officers and major shareholders of both EQS and MVC and have received no response. They simply feel they have no need to respond to their shareholders or even be concerned about their best interests. I am attaching both letters (below) in the hope that someone out there can advise me on what to do next.

Even with all these issues, it is my intention to maintain my 150,000 shares in EQS and to possibly buy more from time to time. It is simply too good a deal. Possibly because of all these issues, it is very cheap. The cash in the bank alone is roughly $1.50 per share. I am satisfied with EQS' holdings in MVC as it is also selling below its net asset value and seems a well run company and pays a nice dividend. PalletOne seems to be booming and I now receive almost daily motivational emails from the President. Please check out their website as it is truly interesting and gives a strong hint as to how well they are doing. Lastly, the diversified portfolio of oil and gas properties managed by Chevron does lose some money but has also been substantially written down by EQS. Oil and gas has always been cyclical and a recovery in the next few years is a strong possibility. You are not paying much for these properties and they may surprise everyone. EQS is a speculative but very cheap investment.

Here are the letters I sent:

June 27, 2016

Board of Directors

Equus Total Return Inc.

700 Louisiana Street - 48th Floor

Houston, Texas 77002

Board of Directors

MVC Capital Inc.

287 Bowman Avenue - 2nd Floor

Purchase, N.Y. 10577

Greetings:

I am a concerned shareholder of Equus Total Return Inc. ("Equus") with approximately 150,000 shares. The agreement of reorganization between Equus and MVC Capital Inc. ("MVC") appears to have been mired in a quagmire of stagnation since 2014. Equus in reliance has liquidated much of its assets and has been dissipating its cash with disproportionate operating expenses based on its market value, which has been a detrimental to its shareholders.

I would humbly recommend that Equus use its cash to tender for its shares. This would be beneficial to MVC as well as the other existing shareholders. Based upon market price, this tender of shares would produce an immediate incremental increase in net asset value per outstanding share. Equus has enough cash to absorb any and all shares tendered by MVC, giving MVC the option to elect to terminate its relationship with Equus or to continue with the proposed reorganization. MVC would have the freedom to rethink its investment in Equus and its decision would provide more clarity to existing Equus shareholders who would finally have some assurance as to the termination or continuation of the proposed reorganization.

This is a win-win situation for all parties which can only result in an increase of the net asset value per share of Equus and a greater transparency as to its future. I am a retired attorney residing in Miami who has no further interest other than enhancing my investment.

Respectfully submitted,

Robert L. Lewis

July 29 , 2016

Board of Directors

Equus Total Return Inc.

700 Louisiana Street - 48th Floor

Houston, Texas 77002

Board of Directors

MVC Capital Inc.

287 Bowman Avenue - 2nd Floor

Purchase, N.Y. 10577

Greetings:

I last wrote to you on June 27, 2016 and have never received any response. In the hope of refreshing your recollection, I am a concerned shareholder of Equus Total Return Inc. ("Equus") with approximately 150,000 shares. The agreement of reorganization between Equus and MVC Capital Inc. ("MVC") appears to have been mired in a quagmire of stagnation since 2014. Equus in reliance has liquidated much of its assets and has been dissipating its cash with disproportionate operating expenses based on its market value, which has been a detrimental to its shareholders.

I had humbly recommended that Equus use its cash to tender for its shares. This would be beneficial to MVC as well as the other existing shareholders. Based upon market price, this tender of shares would produce an immediate incremental increase in net asset value per outstanding share. Equus has enough cash to absorb any and all shares tendered by MVC, giving MVC the option to elect to terminate its relationship with Equus or to continue with the proposed reorganization. MVC would have the freedom to rethink its investment in Equus and its decision would provide more clarity to existing Equus shareholders who would finally have some assurance as to the termination or continuation of the proposed reorganization.

A response would be appreciated

Respectfully submitted,

Robert L. Lewis

Disclosure: I am/we are long EQS, MVC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own 150,000 shares of EQS and 100 shares of MVC