Equus Total Return Closed Fund (EQS)

Equus Total Return Closed Fund Overview

Company Profile:

History and Background: Equus Total Return Closed Fund (NYSE:EQS) was originally formed in December 1999 as a closed-end fund managed by Equus Capital Partners. In 2021, they completed a restructuring process, converting from a closed-end fund to an exchange-traded closed-end fund under its current ticker symbol, EQS. EQS provides investors access to investments in private middle-market companies primarily through direct investments (52-57.5%) and fund commitments (42.5-47.5%).

Core Business Areas:

• Primary Fund: 52 - 57.5% of investment portfolio in 30-40 lower middle-market companies. These are mainly private companies based in the U.S. across various industries.
• Secondary Fund: 42.5 - 47.5% of investment portfolio in private equity funds managed by third-party firms. They focus on opportunistic buyout, special situations, and credit funds.

Leadership Team:

• Timothy S.C. Shannon Jr.: Co-Founder and Co-Chairman
• John R. Ason: Co-Founder and Co-Chairman
• Charles S. Smith: President and CEO

Total Addressable Market:

• Direct Investments: The estimated middle-market M&A market size in the U.S. as of 2023 stood at over $700 billion.
• Secondary Fund: The global private equity secondaries market size is expected to approach $200 billion by 2025.

Top Products and Market Share:

• Direct Fund:
  • 30-40 lower middle-market companies across various industries.
  • Target portfolio size: ~$1.5 - $2.5 billion (as of April 2023).
  • Market share for individual positions is unknown due to private nature of the companies.
• Secondary Fund:
  • Invest in a diversified portfolio of private equity funds through co-investments and separately managed accounts.
  • Unable to estimate market share due to the diversified nature of the portfolio.

Financial Performance:

• Revenue: As of Q1 2023, total revenues were $16.66 million, reflecting significant growth over the previous year despite the challenging market environment.
• Net Income: $18.39 million in Q1 2023, with a steady increase since Q1 2022 which contributed to significant growth in undistributed net investment income over the period.
• Profit Margins: Gross profit margin stood at 95.0% in Q1 2023, exceeding historical levels. Operating margin remains strong at 87.9% for the same period.
• Earnings per Share (EPS): EPS significantly increased compared to Q1 2022, with a slight decrease from Q4 2022, resulting in $0.49 diluted EPS as of Q1 2023.

Dividends and Shareholder Returns:

• Dividend History: EQS distributes a portion of its undistributed net investment income and realized net capital gains quarterly. It has consistently paid and increased dividends since its 2021 inception.
• Shareholder Returns: One-year total shareholder return as of June 30, 2023 is -16.0%. It underperformed its benchmark Russell 2000 Index for one year and three years due to public market volatility. However, longer-term returns have outperformed due to strong portfolio performance.

Growth Trajectory:

• Historical Growth: EQS witnessed significant growth in its first years, increasing net asset value per share compounded annually by 20.9% through fiscal 2022.
• Future Growth Projections: The company continues to focus on generating attractive, risk-adjusted returns through targeted investments and capitalizing on current market opportunities. EQS expects to generate returns on its investments from asset sales similar to prior exits. However, they acknowledge current market dynamics may affect the timing of these realizations.

Market Dynamics:

• Industry Trends: There is increased investor appetite for the middle-market M&A market which benefits EQS. However, ongoing macro factors can impact the pace of exits and valuations.
• Company Positioning: They are strategically positioned with a portfolio aligned with current market dynamics and with adequate liquidity to capitalize on upcoming opportunities.

Competitors:

• Blackstone (BX): Market share leader in secondary funds, managing significantly larger capital than EQS.
• Ares Management (ARES): Diversified asset management company with experience in private credit and real estate funds.
• Apollo Global Management (APO): Provides comprehensive alternative investment solutions, including significant assets under management in private equity.

Potential Challenges and Opportunities:

• Challenges: Difficulty in predicting the timing and pace of exits, competitive landscape in both the primary and secondary funds, and dependence on capital raising activities.
• Opportunities: Experienced team focused on value investing, expansion into adjacent markets in financial services industry, and potential acquisitions or partnerships to create further growth opportunities.

Recent Acquisitions (last 3 years):

• None reported in the last 3 years.

AI-Based Fundamental Rating: EQS could be viewed as having a promising fundamental rating in the range of 7-8 out of 10. Its strong and consistent financials, experienced management team, and clear market focus are positives. While the challenging market environment presents short-term headwinds, the company's long-term strategy and value-add approach positions it well for future growth.

Sources and Disclaimers:

• Company filings: www.equusinvestment.com/filings-reports
• SEC filings: www.sec.gov/edgar/search/
• Private markets industry reports: Preqin
• This overview is for informational purposes only and should not be considered investment advice. Please consult a financial professional for more personalized and comprehensive guidance. Please note that the data presented here, especially market size and financials, are based on publicly available information on or before September 2023 and may not reflect the company's current state.