Difference Capital to be ‘cautious:’ new CEO

Henry Kneis’s first official day as chief executive at Difference Capital Financial

Inc. was Wednesday, the day after the company made a series of announcements including ending the external management agreement it had with a related party.

But that change, where Kneis, the former chief financial officer and former chief operating officer replaced Michael Wekerle, capped a process that started about nine months back when some senior executives and directors left.

“Those (departures) allowed us to be a lot tougher in certain areas that we had to be tougher on,” said Kneis, adding that this week’s announcements took a long time because of the need to get valuations and approvals for the related party transaction, and the need to receive approval from the regulators, specifically the OSC and the TSX.

“I had hoped to get this done by the end of last year.”

Now that he officially holds the reins, a key part of Kneis’s challenge is to “show some positive realizations and exits” from Difference’s portfolio companies. At March 31, the fair value of the company’s investments was $84.6 million.

Kneis’s other challenge is to get the market to believe its net asset value of $1.86, which is almost twice its share price. Until the gap closes, Kneis is unable to raise capital.

“We believe in the NAV, I can’t in good conscience, raise money and dilute shareholders,” he said, noting that timing is important because almost $50 million of debentures are coming due in 2018.

Over the next six months, Kneis plans “to focus on the existing portfolio,” and make some “small followon investments.” But he plans to be “very cautious” when it comes to deploying capital for new investments. Difference has about $24 million in cash and cash equivalents.

So what went wrong after hopes were so high three years back?

Part of the optimism at that time was based on the willingness of investors to give the team lots of capital. In July 2013, it raised $45 million in common shares and $56 million via convertible debentures. Legendary investor Ned Goodman also gave support and capital.

Kneis said “we made too many investments too quickly. We were overly active,” noting that the company has had to take writedowns on at least two of its larger investments, Lignol and Virgin Gaming.

Kneis said the firm had “expanded quickly,” with the result “there were a number of differing views as to how the business should evolve.”

One view was that the company should focus on its investment advisory business, an attractive option because of the fees that were generated. Another view was that investments should be the priority.

In Kneis’s view, there is “an inherent conflict of interest” between the two. “Some poor decisions were made and we are paying the price,” he said. In response to the executive changes, shares of Difference on Wednesday rose to 8.3 per cent to $1.04.

But Kneis said that it wasn’t until the arrival of Tom Liston, a veteran research analyst in the summer of 2013, that the company implemented “an institutional-quality and rigorous investment screening and due diligence process.” And Liston’s involvement in sourcing new investments has altered the portfolio mix. About 45 per cent of the current assets are in pre-IPO stage, or five times what existed in 2013.