Another day with egg on my face. Today, Vertical Capital Income (VCIP) announced that ahead of their pending closing with Carlyle, the fund had liquidated most of their portfolio of residential mortgage whole loans (which was a condition of closing) for a 17% discount to their last reported NAV on 6/30, a full 11 days ago. In their own words:
Based upon the expected proceeds from this sale, which resulted in aggregate proceeds lower than the book value of the combined assets due to the significant sale needed to facilitate the Transaction, the Fund has adjusted its net asset value per share (“NAV”) from $9.96 as last reported on June 30, 2023, to $8.27 as of today.
Huh? Seems like there must be a typo or a word was deleted between significant and sale as there’s an extra space in there.
The portfolio assets are residential mortgages, most of them are fixed rate, rates have moved slightly up in recent weeks but not enough to justify that discount. The old management, Oakline Advisors, is kind of an odd shell that is probably checked out at this point and the board of trustees barely own any stock (0.18% as a group). The incentives to execute a full competitive auction to get best execution just probably weren’t there, someone got a steal. Carlyle doesn’t care either, they just want to be handed a bank account with cash in it, doesn’t matter to them how much is in the bank account, they’re going to go through with their tender and subsequent investment at the value of the cash account. Not sure how management or the board of trustees can get away with having a shareholder vote a month ago to approve the transaction based on such a faulty mark. But that’s above my head.
What does it look like from here?
Based on the press release, looks like the deal will close by the end of the month, this will all happen pretty quickly. Shortly after the deal closes, Carlyle (from the management company, not the fund) will pay $0.96/share in cash to shareholders and then will tender for $25MM at NAV. If we assume the market is fully pricing in the $0.96/share payment, everyone tenders in full, my math comes up with a proforma price of $7.26/share or 88% of NAV. Please check my math.
The other CLO equity funds trade above NAV. It will take time (6-12 months?) for Carlyle to ramp the portfolio up from zero, add some leverage, etc., to get to the point where it looks like one of other CLO equity funds. The world could change in the meantime. But Carlyle should be incentivized to make this trade close to NAV, they’re one of the largest CLO managers, they want the captive CLO equity vehicle to grow that business. In its current size, VCIF is too small to accomplish that, if it trades at or above NAV, Carlyle will be able to issue shares accretively and everyone is happy.
Disclosure: I own shares of VCIF
