[Note: this piece was also posted at Seeking Alpha]
For most of my thirty years in the investment business, I’ve been skeptical of closed-end investment funds. Then I flew to Dallas and shared a plate of barbecue with Gary Martin, the personable, soon-to-be-retired president of Capital Southwest Corporation (CSWC). Martin was in a good mood during our lunch meeting, and not just because it was a Friday. As he described the company’s history and its current outlook, he had the relaxed, calmly confident look of an executive with nothing to hide, sell, or prove.
“We let our numbers speak for us,” he said.
Those numbers are quite persuasive. Since Cap Southwest’s initial IPO raised $15 million in 1961, it has quietly grown 13 percent a year by buying into well-managed private companies and holding onto them for long periods of time, even after many of them go public. Like Martin and his fellow executives at Capital Southwest, the businesses they invest in are not flashy. They make things like industrial lubricants (Rectorseal), farm equipment (Alamo Group), and copper wire (Encore). They also make a lot of money, which Capital Southwest frequently shares with its stockholders. Last year, it passed along a capital gains distribution of $17.59 per share. CSWC is also surprisingly undervalued. As Philip Mause persuasively documented several months ago, the stock trades at a significant discount to the company’s net asset value.
But none of these factors explain why I set aside my longtime doubts about CEF’s and bought $3 million worth of CSWC shortly after my lunch with Gary Martin. The real reason I’m long on Capital Southwest is that familiar refrain from the real estate industry: location, location, location. Or, to be more specific, Texas, Texas, Texas.