Kim and Terry Pegula keep adding to their Western New York business empire.
This time, the Pegulas are branching out into venture capital, adding a majority stake in Buffalo-based Rand Capital Corp. to their already massive holdings in sports and real estate around the Buffalo Niagara region.
The Pegulas, through their East Asset Management business, are paying $25 million to buy a 57 percent ownership stake in Rand, a venture capital firm that had been looking for ways to increase its returns for shareholders as its stock traded at a better than 50 percent discount to the value of its investments.
This will expand the Pegulas' local business interests, while keeping the venture firms' current management, led by CEO Pete Grum and Daniel P. Penberthy, its executive vice president.
The deal is the latest in a string of investments in Western New York by the Pegulas since they acquired the Sabres. Since then, the Pegulas have purchased the Bills, built the $200 million HarborCenter hotel and ice rink complex next to the KeyBank Center. The Pegulas also have made a series of other investments in property and real estate near the arena, including the former factory building that now houses the Labatt Brew House that opened last November.
"East's investment in Rand is a testament to the platform we have created, as well as their commitment to Buffalo and Western New York," Grum said during a conference call Friday.
For Rand shareholders, the payoff from the deal will be immediate. Rand will take an amount nearly equal to the proceeds from the deal – $22 million in all – to pay a $1.50 special dividend to its shareholders. The dividend will be paid out in the form of 20 percent cash and 80 percent stock..
The deal also will give Rand more money to invest in early stage companies, although its strategy is likely to shift more heavily toward investments that generate income, rather than taking stakes in fledgling companies that are at a high risk of failure or, if they pan out, take years to pay off.
Rand said last month it has received a commitment for $6 million in additional U.S. Small Business Administration funding for its Small Business Investment Co.
"This is a transformational event for Rand Capital," Grum said. "The benefits of their investment and management talent provide the platform for future growth that will benefit Rand shareholders."
The Pegulas are buying 8.3 million shares of Rand stock for $3 a share – a 33 percent premium to Rand's closing share price on Thursday. Their $25 million investment in the company includes $13.5 million in cash and $11.5 million in income-producing investments that were made during the previous two years. Those investments are expected to generate interest and dividend income for Rand, increasing its cash flow.
"With additional capital resources, an enhanced investment team, streamlined operations and a shareholder-friendly structure, we are excited about Rand's potential to deliver consistent shareholder value over time," said Adam Gusky, the Florida-based chief investment officer at East Asset Management.
The deal, which must be approved by Rand's shareholders, is expected to close during the third quarter.
As a tiny venture capital firm, Rand has long struggled to get investors to recognize the value of its investment portfolio. At the end of September, Rand's investments were worth $4.84 per share, but its stock closed Thursday at just $2.26, a more than 50 percent discount to its portfolio's value. And even with the Pegulas paying a 33 percent premium to acquire its Rand stake, a $3 share price still is a 38 percent discount to the firm's net asset value.
As part of the deal, Rand will change its ownership structure, becoming a Regulated Investment Co. That change is important because it carries significant tax advantages, most notably the elimination of corporate taxes on Rand's annual earnings, as long as nearly all of those earnings are paid out to shareholders as dividends.
Rand said it plans to pay regular cash dividends once the deal is approved as a way of meeting the requirement that it pay out more than 90 percent of its taxable income to shareholders.
Almost half of East's investment in Rand will come through the transfer of its investments in six companies, mainly in the southeastern U.S., to Rand's portfolio. Those investments, mainly debt instruments that yield an average of 12 percent annually, are expected to add more than $1 million annually to Rand's income stream.
Those six companies weren't identified, but Rand officials said they are in industries ranging from manufacturing, distribution and medical products to retail services, entertainment and self-storage. The investments were between $1 million and $3 million apiece.
East Asset Management also will be able to designate two nominees for Rand's board of directors.
"We plan to intensify our focus on income producing assets, even more than we have in the last couple of years, to support a planned, ongoing dividend in the future," Grum said.