Microcap Activism is a Hard Road to Travel

Some people know me by my book, Dear Chairman, but what they don’t know is I’m an avid microcap investor. Along with teaching value investing at Columbia Business School, I co-manage a fund called Bandera Partners and we are active in the microcap space. I sent Ian one of my quarterly letters from a few years ago describing a long and arduous story with a microcap company, and he thought it was interesting enough to share with the world.

In 2003, I found a company called UCI Medical Affiliates with a market capitalization of about $3 million.  I was in my twenties, working as an analyst at a distressed debt hedge fund in New York City.  UCI, which ran urgent care clinics in South Carolina, had recently emerged from a rare bankruptcy that preserved the equity. Several large blocks of stock were available, but I failed to convince my superiors to buy them.  I then bought some shares in my PA and embarked on an intense, eight-year, hard knocks education in microcap investing.  I’ve been hooked on microcaps ever since, for better and for worse.

In early 2011, Bandera Partners (which I run with my partner Greg Bylinsky) negotiated UCI’s sale for $65 million.  It felt like a minor miracle.  A mere two years earlier, UCI’s valuation had fallen all the way back to the $3 million it garnered when I first found it.  I ended up writing 6,000 words about the investment in our next quarterly letter.  I also attached some of our correspondence with UCI’s majority owner, Blue Cross Blue Shield of South Carolina, as an exhibit.  The letter was so well-received by our investors, that it gave me confidence to write “Dear Chairman.”  The book takes its structure from this quarterly letter—a fun narrative followed by an original letter from shareholder to company.

I’m excited to share the UCI saga here, for investors that have learned the hard lessons that microcap investing offers.  It is a lurid tale with all the hallmarks of value investing: drug addiction, suicide, prison, and, worst of all, accounting restatements.  When I waltzed into this investment, I was incredibly naïve about public companies, boards of directors, and corporate governance.  In fact, with UCI I committed the cardinal microcap investing sin: I bought into a company controlled by a majority shareholder.  Don’t worry, as you’ll see, it got much worse.

You can read the full story in my Bandera Partners Q1 2011 Letter [HERE].

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