The ACTG Short Thesis

See the email below, which I sent to a well-regarded short seller back in Q4 2010 (fortunately I was not short at the time, but did gainfully short ACTG later on):

———- Forwarded message ———-
From: YYYY
Date: Fri, Nov 12, 2010 at 4:28 PM
Subject: Thanks
To: XXXX

Hi XXXX,

Have you had a chance to take a look at Acacia (ticker “ACTG”)? I believe ACTG may provide a good short-selling opportunity within the next few years, or at least I believe thorough research/analysis would provide a compelling story/thesis to gainfully shorting the name. My take is: “Acacia’s stock price warrants no premium to earnings (or any cash flow metric) because its earnings are low quality (inherently volatile and concentrated), and the market will in time recognize that.” As I may have mentioned, I have had conversations with a private competitor of theirs and have good relationships with them. They state that Acacia historically has only proven to be good capital raisers (via IPO, secondaries, etc.) but poor operators (I investigated the cash flow generative ability, or lack thereof, for their entire history; it’s true). To be continued…(I’m working on it right now)

I’ve been publicly shorting and cautioning people against ACTG since 2011 (and much more vocally in private. To this day, it’s not clear to me how one gets comfortable holding a long position in this name. I recall one shareholder who seemed to gloat about having inside information (it’s unclear if the information was Material Non-public Information). That increased my conviction that this was a long term sell (though entry and exit prices have mattered very much, as it has been a volatile name), as the holders are probably of the fast money variety, and weak hands.

Just to elaborate on the above thesis: ACTG seems like nothing more than a intellectual property hedge fund, but with the illiquidity of a long duration private equity/venture capital firm. ACTG’s earnings are inherently more volatile than a hedge fund’s, and its holdings are more illiquid than a private equity firm’s holdings. ACTG represents the worst of both worlds. If you’re a hedge fund owner, how much are you willing to pay up for a hedge fund? How much are you wiling to pay for a “stream” of cash flows that is lumpier than your own, and harder to liquidate?