Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of KCAP Financial (NASDAQ: KCAP), a private-equity and venture capital firm that specializes in buyouts and debt investments, plummeted as much as 25% following the release of its second-quarter results and receiving an analyst downgrade.
So what: For the quarter, KCAP Financial delivered a profit of $0.20 per share and declared a quarterly dividend of $0.28. By comparison, the Street had been projecting EPS of $0.26. Total investment income for the period rose 18% to $11.2 million as dividends from its asset manager affiliates segment soared 175%, but were countered by an 11% drop in dividends from its collateralized loan obligations segment.
CEO Dayl Pearson commented that the quarter was a challenging one from a credit market perspective, with his company choosing to ramp down its investment activity until it sees a more favorable environment. On the heels of this news, brokerage firm Keefe Bruyette downgraded KCAP Financial to "market perform" from "outperform" and placed a $10 target on the company (basically flat with yesterday's close) on the expectation that its earnings weakness could continue over the near term.
Now what: Here we have the upside and also downdraft of investing in private-equity firms. Although most expenses tend to be minimal with such a small staff, these businesses have little control over how markets react, so investors in these companies have to understand that boom and bust cycles will occur. While its earnings power could definitely weaken a bit, KCAP Financial's hefty dividend and reasonably low forward P/E certainly do appear worth a deeper dive for income-seeking invesotrs willing to take on a bit more risk.