How to Buy Alternative Energy for Free

Equus Total Return (NYSE: EQS) is a closed-end fund that trades at a 42% discount to its net asset value. It invests primarily in both debt and equity instruments of small-caps and private companies. Each quarter, management must report the fair value of its net assets, but the stock market value of Equus is much lower than that of its net assets. Here's a chart showing Equus' discount to its net assets for the last five years:
As we can see, Equus is used to trading at a discount to its NAV, but recent negativity across the US market has taken it to even newer lows relative to what it owns.

One of Equus' key holdings (in fact, it makes up almost one third of its portfolio) is an equity position in Infinia Corporation. For those who aren't hardcore alternative energy aficionados, Infinia is a company aspiring to mass produce a low-cost solar power converter. The fair value of one of Equus' investments in Infinia (based on follow-up venture capital investments) recently jumped from $3 million to over $20 million, as the company demonstrated a protype late last year which converts solar energy into electricity at twice the efficiency and at a lower cost than existing products.

One way to look at a purchase of Equus' stock at this discount level is that for the price one share at $6.90, you're getting all of its other assets (which are worth about $8.30/sh) for a slight discount, and on top of that getting the investment in Infinia (valued at $3.50/sh) for free! Of course, before jumping in blindly you'll want to make sure you read Equus' latest reports along with its financial statements and their notes, as we've discussed here.

In reading these reports, I found that Equus does carry some debt on its balance sheet, which is somewhat rare for a fund. This has the effect of amplifying any changes in the values of their investments, both to the upside and the downside (the effect of leverage). Furthermore, most of the investments are in companies that aren't public, and therefore Equus is not as liquid as those funds that invest only in the stock market (undoubtedly, this liquidity premium contributes to the larger than average historical discount we see in the chart above). The lack of market quotations also makes it more difficult for management to value each of it's holdings.

Infinia is one such example, as it doesn't trade on the stock market and so it's not available for an individual investor to buy. Although the drawback is that Equus' investments are illiquid, it provides an investor the opportunity to get into a company like Infinia when it's otherwise limited to venture capital firms only. The discount is a bonus that makes this an intriguing play from a value investing point of view.

Disclosure: Author has no position in Equus.

Comments

[fxtrader07:]

Looking at the history of this etf it has a negative return excluding distríbutions since 1993 and only a slightly positive (about 2-3% p.a.) including them.
What disturbs me here - and most likely is the major reason for this mediocre performance is the HUGE annual management fee of an outright obscene 5.48%. yes you read that right. management of the fund pays itself a hefty 5.48% every year. (That even makes the ridiculous 2/20 fee structure of many hedgefunds look like a bargain.)
As I see it, it's a vehicle purely designed to enrich the fund management company. Buyers beware.

2008 Jul 29 02:56 AM

[Clavis:]

How do I get on the board of Equus Total Return (NYSE: EQS)?
Sounds like a good wheeze to me!

2008 Jul 29 08:54 AM

[redbaron:]

I agree with FXTrader. I have watched this fund for several years, as it always stands out as having a huge discount to NAV. But instead of the discount declining, it is increasing, and something stinks here. Further, what happens is the very speculative investment in Infinia doesn't work?

2008 Jul 29 08:56 AM

[Steven Ward:]

This fund is 100 percent speculation and the market discount to NAV is proof. But so what, who wouldn't want to own 100 to 200 shares as a "flyer". My only problem is that management isn't wedded to to the shareholder via pain and performance. That's why I'm not buying. The risk part I like, its fun, win or lose.

2008 Jul 29 08:44 PM

[Steven Ward:]

The shareholders need to revolt and install management with a better performance option or new management entirely.

2008 Jul 29 08:46 PM

[Saj Karsan:]

Hey FX, you're right those are high fees. A lot of it is undoubtedly due to the type of fund this is, investing in many many small private companies, therefore often requiring a wide range of expertise. By the way, looking at returns since 1993 can be a bit deceptive, as since 2003 the fund has gone from $68 million in equity up to $103 million. I'm not saying that's the best time-frame to evaluate them on, but a lot has happened since 1993!!

Hey Red, as pointed out in the article, even if Infinia is worth nothing, you still own more than what you paid for (assuming you believe the valuations, which are tough to do when there's no quotations).

Thanks for the comments.

2008 Jul 29 11:36 PM