David Skriloff is a Renaissance financial guy – either that or a man with more lives than a cat. He is currently running MKM Capital Advisors LLC in New York City, a firm he founded in June 2008, after a couple of years as a Managing Director at Vision Capital Advisors where, among other things, he raised a $100 million closed-end fund for investing in China.He was a co-founder and EVP of Millivision, a homeland security company that eventually was subsumed by L-3, and whose scanning technology has recently been introduced by L-3 and the TSA at Denver Airport.Prior to that he was CFO of eGlobe, a Nasdaq-listed international telcom carrier, and was co-head of telcom banking at Gerard Klauer Mattison in their go-go days throughout the 1990s. He went to school at Carnegie-Mellon in electrical engineering, and took an MBA from NYU.
David founded MKM with the goal of being a longterm investor in small and microcap companies. Most of the investments in his $20 million portfolio are publicly traded (75%); the nonpublic portion (25%) is composed of companies with a prospect of near-term liquidity, either from M&A activity or from a potential reverse merger into a public shell. MKM is industry agnostic, but invests in non-cyclicals and tends to be event-driven.
We talked to David yesterday and asked him to give us an example of the type of company he looks for.He nominated Covington, KY-based Valley Forge Composite Technologies Inc (EBB: VLYF, http://www.vlyf.com), a “homeland security” company in the broadest sense.
They have,” Skriloff said, “two detection systems: one that looks at people, and the other that looks at metal cargo containers.Our judgment is that the cargo screening system is far and away the best available, especially since cargo container screening is a difficult task .This is the only technology that we know of that works. Their people screener is also the best of breed but in a more competitive space. We are excited about both products, particularly since the company has recently announced its first major order from a Middle East government, but are most excited by the cargo screener since it is truly unique. With my background at Millivision, transportation scanning is a segment I have paid a lot of attention to.
“Valley Forge is a newish company founded on technology that originated in Russia. In a post-9-11 effort to guarantee that Russian nuclear scientists did not go to work for ‘dangerous’ regimes, the US, through DOE, provided funding for the commercialization of certain Russian technologies. Through this program Valley Forge was able to form a joint venture with Lawrence Livermore Labs and the Russian Lebedev Institute to commercialize Lebedev technologies. MKM was the first institutional investor; prior investments were a combination of government grants and friends & family.”
We checked, and VLYF closed March 3 with a market cap of just under $25 million, a stock price of $0.47, and average trading volume of just over 30,000 shares, probably double-counted. We asked if stock liquidity is not a concern for MKM.
“We don’t care about liquidity,” Skriloff said.“We are not short-term investors. There is a point of view that says that low liquidity can position us to get an even better value for our investment than we would if there were a lot of trading. We tend to buy senior secured convertible notes with warrants, and we are very risk-averse, which means that we try to make sure that our investment is potentially covered with some saleable asset. In the case of VLYF, we could recoup easily by selling the technology. But assuming the company performs in the way we believe it will, our investors will do very well indeed.”
That example told us a lot about the style of investing, which seems to be characterized by an eagle eye for strong niche noncyclical products balanced by a careful structure pointed at capital preservation.
“We seldom look at biotechs or drug development companies,” he said. “The problem is that drug development is too expensive, takes too long, takes too many expensive people and laboratories. Medical devices are different; we tend to like them. If their 510(k) is nearly finished, they have potential joint-venture partners, and they are pointed at major indications, we want to see them.
For instance, we have investments in a diabetes device company, Echo Therapeutics Inc (EBB: ECTE, http:www.echotx.com) . It is a company that has developed a non-invasive, needle-free, continuous glucose monitor in conjunction with MIT. But we are wary of large cash burn rates in today’s economy. We tend to like companies that, in a pinch, we could keep funded ourselves if no one else stepped up to the plate – not that we prefer to be a sole funder (we don’t), but being a sole funder is better than a sale on the courthouse steps.” ECTE is trading at $0.62, vs a 52-week high of $2.15, for a market cap of about $11.7 million.
He said his fund likes greentech companies too, primarily those that are developing technologies or gear, rather than those that are generating electricity. He mentioned a company with a technology developed at Rice University for a new photovoltaic approach that works with the entire light spectrum, and not just visible sunlight. As a result, it can product ‘solar’ electricity even at night, and has no carbon footprint at all. Ideally the technology will lend itself to being silkscreened onto any surface: a roof, for instance. But the identity of that company remains secret, until, one supposes, MKM has completed its investment.
San Diego-based Ethos Environmental Inc (EBB: ETEV, http://www.ethosfr.com) is a favorite. This small company specializes in “additives to fuel and oil. Their EthosFR product,” Skriloff said, ” is a nontoxic, non-hazardous additive that reduces emissions and significantly improves fuel efficiency. We invested in the third quarter of 2008, and again in February 2009. We believe their California Air Resources Board tests, which will be completed shortly, together with the completion of several trials by large fleets, will make all the difference for them, which also tickles our own event-driven strategy.” ETEV closed on Tuesday at $0.17, with a market cap of $6.5 million, evidence of MKM’s microcap interest. Their average volume of just over 28,000 shares also testifies to MKM’s independence of a need for stock liquidity at the time of investment.
We asked David who should be investing in MKM itself. He said it is a hedge fund that requires that its investors be super-accredited, and have $5 million in liquid net work. The investment in MKM ought to be between 2% and 5% of an investor’s portfolio, representing the higher end of risk, volatility and returns (although he believes that the downside is limited since the investments are generally convertible notes backed by assets). He said they were up 5% for 2008, not bad for a fund that was only begun in June and therefore could not have made all its money in the comparatively frothy first half of the year. He said they are flat so far for 2009.
Interested investors can contact Skriloff at email@example.com, or by telephone at 212-473-8610.