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Personal Add-on Buy

By Travis Johnson, Stock Gumshoe, August 27, 2015

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Well, I wrote last week about Grenville and their weak quarter, and the general pressure of lower credit quality on their portfolio… and I said I was waiting for some more assurances about management’s ability to handle the fallout of deals that don’t work.

And with prices remaining low today, following the latest announcement on their portfolio this morning, I was reassured enough to add a bit to my personal position. Grenville has now had another very successful exit, doubling their money in a year on the takeover of Above Security by Hitachi that led to a buyout of the royalty contract, so that’s compelling — their two buyouts so far more than make up for the writedowns they’ve had on a couple of their investments.

But perhaps more notable was the indication that they do indeed fight for these royalty deals, and their contracts have some teeth — they had a writedown on their $1 million royalty deal with APO Solutions last year, and in this latest announcement they said that their enforcement efforts have led to recovering almost half of that investment. The fact that there’s some ability, now proven to a limited extent, to get recoveries from their royalty partners in a default gives me a bit more confidence — they’ve always said this was the case, but now it has been done and, even with legal and enforcement costs they’re recouping about 40 cents on the dollar. That’s much better than a 100% loss, and that in combination with their Above Security buyout should make the next quarter’s release look much more impressive.

So it’s still risky, there’s still concern about the falling credit quality in the portfolio (by Grenville’s own assessments), but the strategy is playing out quite well with an occasional big buyout “win” making up for the impairments that are almost inevitable when financing small businesses. I like how they’re doing so far, so I added to my position… and I’ll be keeping an eye on those credit quality metrics in future quarters. I do have a small limit order remaining on my buy for today, so it’s possible that I’ll add a bit more if that order triggers — but most of my order for today has already been filled.

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