Steel Partners Holdings, LP

Steel Partners Holdings, LP ("SPH") offers a rare opportunity to invest in a leading activist investor's portfolio at a significant discount to net asset value. There's even a catalyst on the horizon.

Steel Partners Holdings is run by activist investor Warren Lichtenstein. According to the Financial Times, the partnership produced gross annual returns of 22% from its 1990 inception to 2007. SPH typically engaged in different forms of investor activism, pushing companies to improve operations or seek a sale and often taking a seat on company boards. Steel Partners also had a pioneering role in activist investing in Japan, with mixed success.

SPH ran into trouble in 2008, when the financial crisis caused the value of many of its holdings to drop precipitously. Facing huge requests for redemption, but believing many of its holdings to be too under-valued or illiquid to sell without doing harm to continuing investors, Steel Partners Holdings hit upon a novel solution: going public. Many investors objected to this plan and pressed for a full liquidation, but Lichtenstein prevailed in court. Steel Partners executed a reverse merger into WebFinancial, a tiny pink sheets-traded financial concern operating in Utah, and then distributed the newly-created units to investors in the Steel Partners partnership. The LP now trades under the ticker SPNHU on the pinks. Many objecting shareholders opted to receive cash and in-kind securities instead, so the total assets of the partnership are much smaller than in 2007, when the partnership had $1.2 billion in assets.

Since listing publicly, SPH has remained extremely active. The company succeeded in taking control of Adaptec, renaming it "Steel Excel" and seeking acquisition candidates for the shell. The company's BNS Holding Corp. has expanded into the oil and gas equipment and services market in North Dakota, buying Sun Well Services. The company continues to hold active stakes in many other public companies, including GenCorp, Handy & Harman, SL Industries and others.

As of today, Steel Partners Holdings, LP units are changing hands for around $12.55. However, the partnership held net assets of $18.02 per unit as of January 31, 2012. The S&P 500 Index had a total return of 4.32% in February. If we assume conservatively that the partnership's holdings advanced half as much, current net asset value is somewhere around $18.41. The current trading price represents a discount of 31.8% from net asset value.

If Warren Lichtenstein can achieve returns close to the historical performance of Steel Partners Holdings, investors in SPH will experience magnificent returns. If not, investors can still benefit from a narrowing of the market value/net asset value gap over time plus the market return on the fund's assets.

A narrowing of the large market value/net asset value gap is likely because on December 15, 2011, SPH filed a registration for its units to trade on a major exchange. An uplisting will provide a much greater level of attention and publicity for SPH, as well as enable a much greater cross-section of investors to buy in. Even the worst-performing closed-end funds rarely trade at a 30%+ discount to asset value, much less the investment vehicle of a successful activist manager. Once the market becomes aware of this huge discount, I expect it to evaporate quickly.

Here are a few links with some more information and history:

Steel Partners Holdings, LP website and financial statements

Steel Partners Holdings, LP registration statement

Financial Times story on conversion to publicly-traded entity

No position.