Mill City Ventures III: A Hidd
Some banks are more cautious about lending due to the unfavorable economic situation. Combined with the Federal Reserve’s rate hikes, the gap between banks and specialized finance firms in terms of borrowing costs has narrowed and could offer the latter excellent lending opportunities.
Typically, most non-bank financial firms are known for having a riskier and more aggressive lending approach, but those with a strong risk management framework in play often yield excellent returns in my experience. I recently came across one such specialist microcap finance player that seems promising given its unique lending policy and fast turnaround times: Mill City Ventures III Ltd. (MCVT, finance).
Mill City Ventures III is a Minnesota-based specialty finance firm focused on lending to public and private companies and investing in occasional equity transactions. Its investments are primarily in the form of growth capital, which finances borrowers’ growth, expansion and start-up costs. In addition to financing, the company also offers a certain amount of management support for private and public companies. The firm seeks a form of active investment and advises the companies in its portfolio on financial and operational matters.
Like most other specialty finance players, the company aims to provide investment returns in excess of the market average. When we talk about the type of lending and investment products, Mill City Ventures is known for offering litigation financing, asset-backed loans, title loans, tax prepayment loans, real estate bridging loans, mortgages and other financial services.
High risk, high return loans
Mill City Ventures began as a business development company in 2013 and gradually evolved into a full-fledged specialty finance company and non-bank lender. It falls into the group of specialist finance companies, which are essentially non-bank lenders that lend to SMEs that may otherwise have difficulty obtaining finance.
They have their own differentiated credit policy to evaluate each credit application. The company doesn’t have much of a formulaic, metrics-driven approach like the average bank, and tries to focus on qualitative factors as well as hard data like the borrower’s solvency and ability to pay and the asset value of pledged collateral. Because lending criteria are far more flexible than other financial institutions, Mill City Ventures may charge a higher processing fee and interest rate. Borrowers benefit from a fast processing time, which for some offsets the higher cost of borrowing, and also ensures a good flow of lending opportunities into the company.
The company’s business structure requires fewer reporting requirements than banks, giving it a lot of flexibility. For example, it could easily lend over 50% of its corpus if it encountered a good quality lending opportunity without experiencing a regulatory nightmare. Also, a large percentage of its earnings goes to the bottom line in the form of interest and processing fees, as it has relatively few staff, low overheads and a flat organizational structure, resulting in significantly lower costs for quick quote processing and loan application decision.
Important financial figures
The financial statements of banks and financial institutions are relatively difficult to analyze because they are very different from those of normal companies. It’s easier to directly analyze some very specific financial metrics that can help determine how the company is performing.
Let’s first look at the capital employed. According to its most recent balance sheet, Mill City Ventures has nearly $17 million under management, which it raised through a combination of debt and equity lending in the marketplace. The investment of these funds is currently reporting trailing 12-month revenue of $3.67 million and net income of $1.23 million. The company is able to generate an after-tax return on capital employed of between 7% and 8%.
It is important to note that the company has not reported any real non-performing assets to date and interest flows appear to be regular according to cash flows, meaning that risk management policies are robust. The company’s capital employed has also grown from almost $9 million in 2016 to around $17 million today, but its performance has been fairly consistent.
Past Success Stories
Mill City Ventures’ investor presentation discusses a number of specialized credit scenarios in which the company has had success in the past.
Alatus Development LLC, one of their borrowers, took out a $3.9 million loan to continue work on ongoing apartment development projects. The borrower had significant assets and needed quick capital, which was to be repaid after the apartments were sold. Alatus sold various residential properties and repaid Mill City Ventures and the company realized $365,000 in net interest and closing fee income.
Another example is Mill City Ventures’ $3.4 million loan to Villas on the 79th, which allowed the company to complete the land and apply for final development permits. Management claims to have achieved a 58.29% ROI on this short-term lending business.
As we can see above, Mill City Ventures stock is undervalued based on the GF Value chart. The current return on assets of 7.21% is well above the average for the credit services industry and the gearing ratio of 0.15 is also an indicator of very low leverage.
We can see that the current share price is well below the GF value as well as the Graham number. I am confident in the company’s risk management strategy; CEO Douglas Polinsky is a veteran of the investment management industry and has extensive experience lending to both public and private companies while employed at fairly well-known funds. Overall, I believe Mill City Ventures could be a promising small-cap value opportunity in the specialty finance space.