Equus II (NYSE:EQS) is not the name of an ancient Egyptian king, but a closed-end business development fund that trades on the NYSE. Equus makes equity investments in privately-held companies with annual revenues of $15 to $150 million. EQS’s current portfolio contains investments in 11 old-economy businesses and 2 venture capital funds. The holdings are dominated by a 31% stake in Champion Window Holdings, Inc. that makes up over 45% of the portfolio.
Here’s where it gets interesting. Equus has a trailing P/E of 5.92, a forward annual dividend yield of 6.4%, insider holdings of 24.9%, and cash of $24.44 million. With a market cap of only $65.2 million, that means that cash gross of debt is more than 37% of the share price. With upcoming and recent sales of some of the fund’s positions expected (we need to confirm), cash should shortly make up an even larger percentage of the market cap. One more thing: EQS is trading at about a 22% discount to its NAV. (Data from Yahoo! and ETFConnect. Not sure if it reflects recent sale of stake in Doane Pet Care)
Naturally, there is another side to the story. EQS has traded at a steep discount to NAV since its inception. In 2002 the discount reached over 45%. The NAV itself is suspect because the investments, being privately held, are difficult to value.
In September the company announced that it replaced PricewaterhouseCoopers as its accountant with UHY Mann Frankfort Stein & Lipp. Changes in accountants are usually bad signals, especially when you are replacing PWC with a lesser-known firm.
Management has not done much historically to inspire confidence and the company website is pathetic, and that’s being generous.
Karpus Investment Management, an activist fund that in the past has shaken up closed-end funds trading at discounts to NAV, owns about 7% of the shares. They have made some progress at closing the valuation gap, but are yet to finish the job. Despite the valuation, which is enticing if it’s true, we still wouldn't want to be minority investors in this one. Perhaps your tastes are different.
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