Special Opportunities Fund 2016 Annual Report

The second half of 2016 was quite eventful for Special Opportunities Fund. In July, the Fund distributed rights to its common stockholders to purchase a new class of convertible preferred stock that raised $55.6 million. A portion of that cash was used to fund a self-tender offer that was completed in October for 1.16 million shares of common stock at 97% of net asset value. After giving effect to a year-end cash dividend of $0.81 per share and ignoring the rights offering or self-tender offer, the common shares of the Fund gained 5.13% in the six-month period ending December 31, 2016, closing at $13.65 vs. an increase of 7.82% for the S&P 500 Index. The Fund’s discount to net asset value fell slightly over the second half of 2016 from 13.08% to 12.28% (and currently is about 10%).

Here is an update on some of our significant positions.

It would be an understatement to say that our investment in Emergent Capital has been a disappointment. Emergent owns a portfolio of life insurance policies with an aggregate face value of approximately $3 billion but its actual cash flow has been significantly less than what had been projected. It has become clear that Emergent’s capital structure will need to be further modified to deal with holding company debt and operating and legal expenses and that will likely result in dilution of the common stock.

Previously on SPE. The discount to NAV is currently 9.9%. The big self-tender has tightened up the discount, but it is arguably still to wide for a closed end fund activist fund (What's Good For the Goose is Good For the Goldstein).

Also, Emergent has been a special situation investor favorite for years but has basically gotten obliterated. This is the company with the portfolio of life insurance policies, so it's short the life expectancy of a group of 600 or so people. People point to the present value of the policies, but if the insureds live longer than expected in the valuation model then the present value melts away. Capital has become expensive for Emergent and it has to continue to raise capital to pay the premiums on the policies. I have never understood why the company couldn't negotiate a deal with the insurance companies that wrote the policies to terminate them, since insurance companies have a much lower cost of capital than Emergent there ought to be a win win deal.