FRMO Corporation is the publicly traded investment vehicle of Murray Stahl and Steve Bregman. FRMO Corporation owns a significant stake in Horizon Kinetics, an asset management company controlled by Stahl and Bregman, and various other smaller investments. The company was originally incorporated in Delaware in 1993. In 2001, FRMO spun off its operations, and Stahl and Bregman took over the shell. Since then, FRMO has focused on strategically investing in public and private companies and providing investment-related advisory services.
A company called FRM Nexus (which stood for Food Services, Real Estate Development, and Medical Financing) was formed in 1993. On August 31, 2000, FRM filed Form 8-K with the Securities and Exchange Commission, disclosing its intention to spin off all its operating assets to its shareholders. The disclosure also announced a change of control, with Kinetics Asset Management and a group represented by Murray Stahl and Steve Bregman taking over the reins. The spin-off was completed on January 21, 2001. On November 29, 2001, the company changed its name to FRMO Corp. Murray Stahl and Steve Bregman are from the asset management industry. They manage Horizon Research Group and Kinetics Asset Management operationally and through ownership. After the Spin-Off, the newly named FRMO Corp was basically a shell with $10,000 in cash and 1,800,000 shares of common equity ($0.00056 per share).
Subsequently, the company issued new shares in a private placement. In total, 34,200,000 shares of common stock were issued for $3,258,000 ($0.095 per share). 28.8 million of those shares were issued to the Stahl Bregman group. The transaction is interesting for two reasons. First, Stahl and Bregman overpaid for their FRMO stock ($0.095 vs $0.00056 in NAV of existing shares). Second, they did not pay for the shares upfront but paid with future cash flows they would receive from their stake in Kinetics. The 28,800,000 shares were issued to the Stahl Bregman Group on January 23, 2001, but were held in escrow and delivered as paid at ten cents ($0.10) per share. The Stahl Bregman Group is obligated to pay to FRMO the after-tax amount (fixed at 54% of the dividend) of all dividends they receive from Kinetics until the total of $2,880,000 has been paid. The Stahl Bregman Group expects $2,880,000 to be paid to FRM in about five years. The installment payments depend on actual future dividends received from Kinetics.
Murray Stahl and Steve Bregman explained their vision with FRMO Corp. in the company’s letter to shareholders in 2002:
All of our assets are examples of intellectual capital. The level of business activity can be increased without the creation of expenses. FRMO merely provides management expertise. The firm, in its first year, has built a foundation. Its next challenge is to build a structure upon this foundation. Management will be engaged in this effort in the course of the next year.
– From the FRMO Corp. 2001 Letter to Shareholders (June 2002)
FRMO Corp. made various agreements with other investment managers and investment vehicles in the first year of operation. This included a 7.71% interest in Kinetics Advisors in exchange for 315 shares of FRMO common stock and a 2% interest in the subscription fees of a Horizon Research Group publication called The Convertible/High Yield Arbitrage Report in exchange for 50 shares of FRMO common stock. One of the most important deals for FRMO was an acquisition of research service fees that Horizon Research Group received from The New Paradigm Fund (later renamed the Paradigm Fund) in exchange for 80.003 shares of FRMO common stock. At the time, the fund had under management less than $11 million in assets. FRMO also acquired research service fees from Horizon Research Group from the Middle East Growth Fund in exchange for 3,456 common shares. An agreement whereby Stahl and Bregman would provide consulting services to Santa Monica Partners LP in exchange for $21,600 per year. Santa Monica is, to this day, a shareholder in FRMO.
By the end of February 2002, the balance sheet of FRMO Corp. consisted of intangible assets that included the fee and carried interest-sharing agreements and cash. At the end of February 2002, FRMO Corp had $83,000 in cash and $161,068 in total assets. Fast forward to 2004. Since 2002, no new agreements have been made, but Stahl and Bregman have updated the description of the company a bit. The company description in the FRMO 2004 annual report goes as follows:
FRMO Corp. is an intellectual capital firm. The experience of its management has been in the analysis of public companies within a framework of identifying investment strategies and techniques that reduce risk. The business will include identification of assets, particularly in the early stages of the expression of their ultimate value, and the participation with them in ways that are calculated to increase the value of the shareholders’ interest in FRMO. Such assets are expected to include, but are not limited to, those whose values and earnings are based on intellectual capital. Of the many varieties of capital upon which investors have earned returns, ranging from real estate to silicon, perhaps the highest returns on capital have been earned on intellectual capital. It is the goal of FRMO to maximize its return on this form of asset. The identification of any business opportunities will follow the process employed by Horizon Research Group to select and evaluate investment opportunities and strategies.
At the end of February 2004, shareholder equity had grown to $486,775, with the company owning roughly the same amount in cash and marketable securities. The company now has just over 36 million shares outstanding, with a book value of about 9.6 cents if one factors in the shares that have been issued to the Stahl Bregman Group but are yet to be paid. In a shareholder letter dated June 16, 2005, Steve Bregman explained that FRMO Corp cannot produce audited financial statements, conforming to SEC regulations. Due to changes in accounting guidelines, FRMO was now required to consolidate its 8.44% stake in Kinetics Advisers, LLC into its operating results. Horizon Advisers is the investment manager of two hedge funds. The two hedge funds were audited, but the LLC was a private company and hence not audited. Additionally, the LLC had a different reporting period than FRMO. As a result, the auditor of FRMO could not reconcile and produce consolidated financial statements of the two entities that were both compliant with the SEC.
FRMO did not issue another annual report until 2009. During the dark period, the share count increased by under seventy thousand shares. At the same time, shareholder equity has surpassed $26 million, bringing book value per share to $0.70. On May 1, 2011, Kinetics Advisers merged with Horizon Asset Management, forming Horizon Kinetics LLC. As a result, the ownership stake of FRMO Corp. in the merged entity is just about 0.5%. Because of the merger, FRMO management was now hopeful of being able to submit fully GAAP-compliant financial statements. On March 9, 2012, Steve Bregman penned an interim letter to shareholders. Since the merger occurred on May 1, while FRMO’s calendar year started on March 1, FRMO could not show a fully compliant 2011 comparison in its 2012 financial statements (due to the one-month overlap). As a result, the SEC did not accept FRMO’s proposal to wait a year to show fully compliant financial statements and required that FRMO de‐register for the Nasdaq exchange.
On January 17, 2012, FRMO undertook a reverse/forward stock split to reduce the number of shareholders of record below 300, thereby permitting the company to de‐register per the SEC’s directive. Subsequently, the company changed its Fiscal Year to the end on May 31 and listed its shares on OTC Markets, a leading over‐the‐counter marketplace for equity securities. FRMO Corp. currently has a market capitalization of around $295 million, but the company is still listed on the OTC Market.
In 2013, Horizon Kinetics and FRMO simplified their revenue stream arrangement. As previously explained, FRMO owned stakes in various revenue streams connected to sources, ranging from research fees to specific mutual funds, hedge funds, and subscription fees from research publications. FRMO swapped all its revenue interests for a single interest equal to 4.199% of the gross revenues of Horizon Kinetics. The Horizon Kinetic revenue stream is a unique asset—no asset is like this in the public markets. Typically, when asset management companies offer a piece of themselves to the public markets, it is through structures that isolate the upside exposure of the partners. The shareholders get paid once the partners have taken their share. The Horizon Kinetic Revenue Share is unique in that it comes directly from the revenues of Horizon Kinetics, essentially before the partners are getting paid. The revenue stream is and will remain volatile from period to period. A significant component of the revenue stream consists of the performance fees paid to Horizon Kinetics, which are highly unpredictable. Furthermore, the asset management industry is transitioning, with funds flowing to passive strategies, such as ETFs, that operate with a much lower cost base. Horizon Kinetics’ ability to generate fees has decreased over the last few years and will continue to do so in the future.
The revenue stream and the equity share are valued at about the same amount on the FRMO balance sheet. Yet, the revenue stream is many times more valuable than the equity stake. While the operations of Horizon Kinetics could easily become unprofitable, it is mathematically impossible for the revenue stream to be a number less than zero. Normally, the lines are drawn clearly when a company sells a revenue or a royalty stream. In the case of FRMO and Horizon Kinetics, the lines are blurry. FRMO owns a revenue stream in Horizon Kinetics and provides intellectual capital to Horizon Kinetics. However, the intellectual capital consists mainly of the combined experience and brain power of Stahl and Bregman. During the third-quarter 2019 conference call, Murray Stahl explained the interaction between FRMO Corp and Horizon Kinetics in more detail.
Question: Over the last few years, you seem to be taking many individual assets, like some of the exchanges on FRMO’s balance sheet, and putting them in HK funds. Is this what will happen to most of the investments? Even the short selling of path-dependent ETFs. Do you see this as a net benefit for FRMO? We get a benefit from the fees clients pay in the funds. But do we have to pay the fees as well?
Murray Stahl: Okay. Here’s how it works: We get an idea and start doing it with FRMO’s capital. To the extent we are doing it with FRMO’s capital, we are not paying any fees. To the extent that we have an investment, let’s say, in the Polestar Fund, we don’t pay the performance fee. We get back dispensation. Obviously, to the extent of an audit and other things, we will participate pro rata because that’s a benefit for everyone, but we don’t pay the performance fees. Whatever we do with FRMO’s accounts, we don’t pay a fee for it. So, it had an investment management rationale in an operational sense because we are trying to figure out how operationally to orchestrate an investment.
One of the qualities of FRMO Corp. is Murray Stahl and Steve Bregman’s ability to embrace change. Many conventional active investment managers have come under severe duress in recent years. In many cases, the distress has been caused by the inability of those asset managers to create distinctive investment products. In a sense, the movement to passive products has exposed many investment managers to the closet indexers that they are. Horizon Kinetics, through the leadership of Stahl and Bregman, seem to have realized early on that if they were to survive, they would need to be genuinely contrarian. The mutual funds that Kinetics Funds manage are eclectic and highly unconventional compared to the benchmark indices. For example, the Paradigm Fund, which is by far the biggest of Kinetics Funds, has a 63.4% position in Texas Pacific Land Trust and a portfolio turnover ratio of just 1%. Horizon Kinetics has also been very active in developing new strategies and products. FRMO was also one of the first conventional asset management companies to start publishing research and experimenting with cryptocurrency. Horizon Kinetics is now actively managing investment products in cryptocurrency mining. Based on comments by Murray Stahl, Horizon Kinetics will expand its mining strategies through a closed-end fund or even a master limited partnership.
FRMO Corp’s principal investment is its stake in Horizon Kinetics, which consists of an ownership and revenue-sharing interest. Horizon was co-founded by Murray Stahl and Steven Bregman, who are officers and principal stockholders of FRMO. Horizon is an investment advisory and independent research firm with research activities serving primarily institutional investors. Horizon provides an in-depth analysis of information-poor, under-researched companies and strategies to identify the complex or overlooked situations that can offer an advantage to the investor. Kinetics Asset Management LLC is an investment adviser to Kinetics Mutual Funds, Inc., a series of seven mutual funds with combined assets under management of $1.56 billion as of September 30, 2023. Peter Doyle and Murray Stahl lead the funds’ investment team. The investment team consists of seventeen seasoned investment professionals with an average tenure of fifteen years with the firm and twenty-five years in the industry. The firm and its employees invest significant capital alongside its investors. Horizon Kinetics also became the investment manager of Renn Fund in June 2017. Renn Fund is a closed-end fund that trades on the Nasdaq Exchange with total assets of $12 million.
Stahl and Bregman favor what they refer to as Croupier Business Models or companies that serve as intermediaries between buyers and sellers. FRMO Corp. holds stakes in several exchanges for securities and other financial instruments. Current holdings include:
- The Bermuda Stock Exchange (BSX)
- Minneapolis Grain Exchange (MGEX)
- OneChicago, LLC
- CNSX Markets, Inc.
- Miami International Holdings, Inc.
- National Stock Exchange Holdings, Inc
- Cryptocurrency investments
Through both FRMO directly and indirectly through various Horizon Kinetics portfolios, FRMO holds an economic interest in cryptocurrencies and cryptocurrency mining operations. FRMO Corp. acquired 353 Digital Currency Group, Inc. shares for $76,261 on February 26, 2016.
FRMO Corp owns 15% of the outstanding shares of Winland Holdings (WELX). Winland was originally named Winland Electronics, an operating company specializing in environment monitoring solutions and sensors. In 2018, Winland changed its structure by moving Winland Electronics to a subsidiary and changing the holding company’s name to Winland Electronics. Subsequently, the holding company has begun investing in bankruptcy claims and corporate claims.
FRMO Corp is one of those peculiar stocks you don’t come across very often. One of the exciting and distinctive things about the FRMO business model is that there is not much business. The company is a labyrinth of different investment strategies held directly and indirectly through various means and investment vehicles. This is particularly peculiar because the management of the company, from which it derives its intellectual capital, seems not to be charging the FRMO for the right to use its brainpower. As a testament to that, the compensation that Murray Stahl receives for sitting on the Board of the Minneapolis Grain Exchange is paid to FRMO and not to him personally.
FRMO does not trade on an exchange but over the counter on the pink sheets. With a market capitalization of about $295 million, it remains one of the largest companies listed as a pink sheet stock. According to the latest filing, FRMO’s shareholder’s equity was $201.6 million. This means the company trades at around 1.5 times the stated book value. This might be considered expensive since there is no operating business and the company is primarily a holding company. Reviewing the most recent balance sheet of FROM, the company has about $392 million in assets, with $39 million in cash and $226 million in marketable securities.
There are three key line items on the FRMO Corp. balance sheet that are not accounted for on a mark-to-market basis:
- Horizon Kinetics LLC Revenue Stream
- Horizon Kinetics LLC Equity stake
- Investments in Exchanges
Since the Stahl-Bregman Group took control of FRMO, the company has invested in various revenue streams tied to ventures with which the group was affiliated, mainly related to Horizon Asset Management and Kinetics Asset Management. In May 2011, these two companies merged. After the merger, FRMO owned a 4.95% stake in the combined entity. At that time, the total AUM of Horizon Kinetics was $9.8 billion. In 2013, Horizon Kinetics and FRMO Corp agreed to merge revenue stream agreements that FRMO had acquired into a single revenue stream agreement—this entitled FRMO Corp to 4.2% of all revenues the asset manager generated. At the time of the agreement, Horizon Kinetics AUM had contracted to about $7 billion. Horizon Kinetics operates mutual funds and separately managed accounts and derives revenues from management and performance fees. As a result, the fee-based revenue that Horizon Kinetics generates can fluctuate quite a bit. On the FRMO balance sheet, the Horizon Kinetics equity stake is $14.6 million, and the revenue stream is $10.2 million. Based on the limited information one can access, reverse engineering those two earning streams can form a valuation basis. Examining the fees FRMO received from the revenue stream, one finds that in the early years, fees grew extremely rapidly as investment strategies and funds, such as Paradigm Fund, gained momentum.
In 2004, FRMO entered a dark period, in which the company was not able to report GAAP-compliant financial statements (a hedge fund they owned a stake in and consolidated had a different reporting period, and as a result, they were unable to reconcile and consolidate the FRMO accounts according to regulations). From 2009 and onwards, however, one has full visibility into fees generated. In 2009, FRMO received over $6 million from revenue share agreements as Assets Under Management reached nearly $10 billion. However, the financial crisis of 2009 significantly impacted Horizon Kinetics and its AUM. As a result, annual fees received over the following ten years are less than $2.7 million on average. Since the revenue stream is valued at $10.2 million on the FRMO balance sheet, this equals a 3.7x multiple of average annual fees.
The earnings quality of the revenue stream could be more predictable. The fees are highly volatile, but FRMO does not consume any cash to generate these earnings, and gross margins are nearly one hundred percent. Hence, the revenue stream is consistently profitable. It is mathematically impossible for the revenue stream to deliver earnings lower than zero. Although the underlying assets between precious metal mining and asset management differ, some parallels can be drawn between the revenue streams. Neither the precious metal companies nor FRMO controls the market price of the underlying assets. On the other hand, the mines have a finite lifespan, while the Horizon Kinetics revenue stream is theoretically perpetual. The streaming companies reinvest their cash flows into new mining streams, while Horizon Kinetics reinvests the cash flows from the revenue stream to other assets.
Assume that one applies the multiples from the streaming companies as a proxy to value the revenue stream. If we use the lowest multiple of fifteen, the value of the revenue stream would come in at $40 million. Using the highest multiple would derive a value of over $67 million. Valuing the revenue stream will always be challenging. One can assign whatever multiple to the revenue stream reflects their required return. Based on average historic fee generation, if one thinks it should be valued at a 10% pre-tax yield to FRMO, the valuation would be just $30 million. Regardless, the revenue shares seem to be undervalued on the balance sheet.
Because Horizon Kinetics is a private company and the size of FRMO’s stake does not require FRMO to consolidate Horizon Kinetics in its financial statements, there is no access to Horizon Kinetics’ financial statements. Nonetheless, one can make an educated guess on the business. There are several publicly traded asset management companies, but most are considerably larger than Horizon Kinetics. To get a proxy of the operating metrics for Horizon Kinetics, one can look at other active managers such as Gamco, Waddel & Reed, and Napier & Manning. Horizon Kinetics is not the only active asset management company suffering from the flight to passive management. The last decade has been marked by significant reductions in assets under management at all three companies mentioned above.
Since we can see the “Revenue Stream” on the FRMO income statement, one can extrapolate Horizon Kinetics’ operating revenues and estimate the earnings that Horizon Kinetics should generate, using Gamco and Manning & Napier as proxies. Assume that the Revenue Share cuts into the operating income of Horizon Kinetics, as opposed to being part of the compensation component. What would the Horizon Kinetics income statement look like if it resembles Manning & Napier or Gamco? Since revenues tend to fluctuate yearly, the ten-year average fees are the best proxy rather than the most recent one. With an income statement that resembles Manning & Napier, Horizon Kinetics would generate about $7 million in NOI or 10.3%. An income statement resembling Gamco Investors’ operating metrics would deliver $34 million in NOI or over 50%. The annual median Enterprise Value/EBITDA Multiple of US-based asset management companies has ranged from 7.5 to 10.2 in private transactions from 2011 through 2018. During the same period, EV/EBITDA multiples of publicly traded asset management companies have ranged from 6.1 to 11.
Applying these assumptions to Horizon Kinetics, with Manning & Napier operating performance as a conservative scenario and applying the lowest multiple, FRMO’s 4.95% stake would represent an average NOI of about $350 thousand. A multiple of 6.1 would value the stake at just over $2.1 million. This is considerably below the value on the balance sheet. Suppose applying the operating performance of Gamco to Horizon Kinetics, FRMO’s share of the NOI would be about $1.7 million. Using the top-range EV/EBITDA multiple, one would obtain a valuation of $22.7 million. This is about two times the current valuation on the FRMO balance sheet. This should be taken with a grain of salt, though. Franklin Resources announced a deal to buy Legg Mason for an enterprise value of $6.5 billion. Legg Mason had $803.5 billion in AUM, so the purchase price was about 0.8% of AUM. Considering that Horizon Kinetics has about $7.7 billion in AUM, a comparable valuation would render a purchase price with an Enterprise Value of $61 million.[1]
Let’s assume that this Horizon Kinetics revenue share and equity stake analysis is within reason. Judging by that, one assumes that the combined value of the revenue share and the equity stake is somewhere in the region of $100 million. If that were to be true, can sum up the following parts:
- Cash and Cash Equivalents: $37.5 million ($39m less $1.5m in short sale liabilities)
- Horizon Kinetics stake: $100 million
- Investments in Limited Partnerships: $71 million
- Equity Securities: $226 million
This accounts for $435 million in value compared to the company’s current market capitalization of $293 million. However, this does not account for the value of FRMO’s private investments in securities exchange companies. Murray Stahl made the following statement:
“You have two choices in exchanges. There are the ones that are at the leading edge in technology, and there are the ones that are not, yet they have a license or licenses. We invest in both, but we mainly invest in the ones that have licenses but are not necessarily technologically developed. The Miami Options Exchange (MIAX) is at the leading edge of technology. Who knows where they could take that technology? It’s a totally fascinating subject. In my opinion, this area is going to move very, very rapidly in the next couple of years […]”
In most cases, these investments have been insignificant, considering the size of the FRMO balance sheet. This included investments in One Chicago, CNSX Markets, and Miami International Holdings for around $250,000 each, less than 0.25% of its equity for each of those investments. But FRMO has also made bigger bets when it comes to securities exchanges. FRMO operates a fund called South Lasalle Partners (a reference to South LaSalle Street, which houses the historic Chicago Board of Trade building). The only asset LaSalle Partners holds is an investment in the Minneapolis Grain Exchange (MGEX). LaSalle owns 14.2% of the seats on the Exchange. The value of FRMO’s stake in South LaSalle was $8.6 million at the end of August 2023, with a cost basis of $5.5 million. Murray Stahl was elected to the Board of Directors at MGEX in 2013 and has held his seat since then. During the 2014 annual shareholders meeting, Murray Stahl elaborated on the MGEX investment:
“One of the activities we have engaged in over the last year that you might not be able to get a sense of from reading the Annual Report has to do with our investment in a private fund that owns memberships in the Minneapolis Grain Exchange, which benefits from many factors, including two modern ideas. One of them stems from a policy change by the Canadian government. For many decades, it bought entire wheat crop of Canada each year. If you were a wheat farmer in Canada, the Canadian government would buy your crop and then sell it all in one lot. You would get your fair share of what was called the wheat pool. Not that many months ago, the Canadian government abandoned that practice. That change is important to the Minneapolis Grain Exchange, because it trades grain. Since the Canadian government closed the wheat pool, Canadian farmers have to hedge their grain. That necessity has led to a certain increase in trading volume for the Minneapolis Grain Exchange.
Another factor that has led to increased trading volume is indexation. There are now commodity index funds that buy wheat. They do not want to make it into bread nor do they wish to trade it. They just want to hold it because, theoretically, it is an inflation beneficiary and that practice has led to some increased trading. As a business, the exchange is like FRMO in that more revenue, with very little incremental expense, goes right to the bottom line. I believe this is going to be a record year for the Minneapolis Grain Exchange. As discussed in the Letter to Shareholders, the Minneapolis Grain Exchange building is about 550,000 square feet. The first question is what is the value of a building? It is maybe a class B building, if you want to be generous, because it was built about 100 years ago. It is one-third vacant. I do not really know what it is worth. All I can tell you is that the current market value of all the Minneapolis Grain Exchange memberships is $80 million. If those 550,000 square feet were worth $100 a square foot, for example, the building would be worth $55 million. It shows you there might be some value in the real estate as well.”
In 2014, FRMO also made a sizable $2.3 million investment in the Bermuda Stock Exchange (BSX) and added to that stake in 2015. In total, FRMO acquired 40% of BSX’s common shares. There are a number of large global companies listed on the BSX through a secondary listing, and the exchange has been profitable since FRMO got involved. But the primary reason FRMO got involved in BSX was the potential of the exchange to become the main venue for trading in so-called Insurance-linked bonds. In 2016, FRMO acquired 50,000 Miami International Holdings, Inc. (MIH) shares for $250,000. MIH owns and operates the MIAX Options Exchange. In the 2016 Annual Letter to Shareholders, Stahl and Bregman make a brief mention of the MIH investments:
“Another recent investment is the MIAX Options Exchange (“MIAX Options”). This is a different type of exchange investment in the sense that an enormous effort has been made by the exchange to develop world class trading technology. This technology is important since options are a much more precise method of risk transference than statistical arbitrage. MIAX Options currently has a 7.49% share of the options market. Year to date volume of 145 million contracts represents a 3% increase versus 2015. The company is unique inasmuch as its systems were designed entirely inhouse. Many potential economy of scale activities are possible with such technology.”
In September 2019, the Bermuda Monetary Authority authorized an acquisition of the Bermuda Stock Exchange by Miami International Holdings. As a result, FRMO received 603,293 additional shares in MIH in exchange for their BSX shares. FRMO’s ownership in MIH increased to 653,393 shares or about 1%. As a result of the transaction, FRMO recorded a gain of just over $1 million. The MIH stake is now valued at $4,322,905 on the FRMO Balance Sheet. Since the exchanges’ investments are in private companies, their financial statements are unavailable. According to the most recent filings, the exchange investments are valued at $12 million. MGEX and MIH have recent valuations, but investments in One Chicago, CNSX Markets, and American Financial Exchange are valued at cost. The Miami International Securities Exchange (MIAX) now lists and trades options on over 2,600 multi-listed classes and had in January 2020 an 11.48% share in the options market. Compare this to CBOE Global Markets, which had a 34.17% market share. Although this is not a like-for-like comparison, since CBOE derives much of its valuation from its ownership of the VIX volatility index, it is worth noting that CBOE’s current market capitalization is over $16.5 billion.
Whatever the value of the securities exchange investments, these companies have one thing in common. They are all developing financial products that, if they were to become adopted in the capital markets, have the potential to be value accretive to the extent that they would multiply the current valuations of those companies. Furthermore, these products would not need significant capital to drive that growth. In that sense, these investments carry an embedded call option. In their current state, these companies are likely to do well for their owners, but if the products they are developing take off, they are likely to do exceptionally well.
FRMO’s involvement in cryptocurrencies is interesting. If one reads the transcripts from the quarterly call or the annual meeting, one would be inclined to think that FRMO is a pure-play cryptocurrency company—many of the questions that management receives concern Cryptocurrencies. Many funds managed by Horizon Kinetics and at least some separately managed accounts have exposure to cryptocurrencies, mainly through the Grayscale Bitcoin Trust. FRMO also holds various cryptocurrencies, although it’s not a significant amount relative to the FRMO balance sheet. FRMO also had the opportunity to invest in Digital Currency Group, a leading investment company in the cryptocurrency space, in over 150 projects. The company has also built up Grayscale Investments, the asset management company of Bitcoin Trust mentioned earlier. Grayscale currently has over $27.5 billion in assets under management. FRMO acquired 0.05% of Digital Currency Group in 2016 for $76,261. The focus of FRMO has been on cryptocurrency mining. In 2017, Stahl and Bregman laid out the premise for cryptocurrency mining:
It should come as no surprise that one can be paid for being a node in a cryptocurrency system. Essentially, since one is paid by newly created cryptocurrency, it might be tempting to say that one is engaged in seigniorage. This term generally refers to the profit made by a government when currency is issued. This profit is given by the difference between the production costs and the face value of the money. For most of history, governments shared this profit with private businesses.
For example, although the Bank of England was founded in 1694, it was privately owned by stockholders until 1946. Some central banks, such as the Bank of Japan, the Swiss National Bank, and the Banque Nationale de Belgique are still partially owned by individuals and they actually trade on stock exchanges.
In the cryptocurrency case, this “seigniorage,” so to speak, can be a profitable activity, and it is called mining. Horizon has actually been engaged in such mining. Recently, Horizon raised about $4.5 million of outside capital in an LLC to offer this activity to outside investors. This entity is known as HK Cryptocurrency Mining LLC. It was not designed as a fee-paying vehicle, since we would like to establish to investors that this can be a rather lucrative exercise. One day we hope to have a number of fee-paying vehicles of this variety. This entity is a completely different type of investment from holding cryptocurrency in a fund, since the cryptocurrency received is sold very shortly after receipt, and the proceeds, after allowance for the depreciation of equipment and related expenses, is simply distributed to shareholders in the form of a dividend.
According to the latest quarterly filing, FRMO now carries $0.5 million worth of cryptocurrency mining assets on its balance sheet. This includes both building and computer equipment utilized for mining operations. In addition, FRMO has investments in four other mining entities valued at $370 thousand.
Here is the paradox of FRMO. Although the small position sizing aggravates some investors, Stahl and Bregman possess firm conviction in some of their investments. Looking at their top ten positions in any of the Kinetics mutual funds, one sees they are more concentrated than the average mutual fund. This is more a reflection of their long-term horizon and tax consciousness. Therefore, they tend not to trim their winners and average down their positions. From the vantage point of FRMO shareholders, there are two significant call options that shareholders are pricing into the stock: Texas Pacific Land Trust (TPL) and a transformative acquisition. Murray’s initial investment in TPL predates FRMO and might have been sometime in the 1980s. Texas Pacific Land Trust is a fascinating case of embedded optionality.
The trust was founded in 1888 after the bankruptcy of the Texas & Pacific railroad. The bondholders received shares of a trust that received 3.5 million acres of land that the railway owned, making the trust one of the biggest landowners in Texas. The trust was governed by three trustees who would lease out land for grazing and sell parcels of land. The trust would then return the proceeds to shareholders through dividends and buybacks. As luck would have it, nearly half a million acres of TPL’s land would have oil and gas under it. In 1920, the first well in the Permian Basin started producing oil. A few years later, the first pipeline was built. The mineral estate was spun out of TPL in 1957, with TPL retaining royalty interests in future production. In 1962, Texaco purchased over two million undeveloped acres of mineral estate. Around 2010, technological advancements in horizontal drilling unlocked tremendous amounts of oil reserves in the Permian Basin, significantly reducing extraction costs. This led to rapid development across much of TPL’s acreage, dramatically increasing the royalty revenues for the trust.
FRMO holds TPL stock directly and as a limited partner through various funds. On a look-through, the amount of exposure to common shareholders of FRMO in TPL is about $115 million. This would equal about 40% of the FRMO equity market capitalization. But these holdings are marked-to-market. However, FRMO indirectly has more economic exposure. All in all, Horizon Kinetics and its affiliated entities own roughly 1,400,000 shares or 18% of the total outstanding shares of TPL. Based on its current price, Horizon Kinetics holds $2.2 billion of TPL stock. If Horizon Kinetics still has around $7.7 billion in assets under management, then 28.5% of it is in TPL. If TPL continues to appreciate, Horizon Kinetics AUM will correspondingly increase. Assuming that the incremental fee generation from management fees and potential performance fees is at 1.29%, this would correspond to incremental revenue for Horizon Kinetics. Assuming that the net operating income after tax of the incremental revenue is 25%, FRMO’s 4.95% stake will likewise increase in value. But with all factors staying the same, that would mean that the AUM is permanently higher.
Murray Stahl has repeatedly stated that, eventually, FRMO will become an operating business. With the cash on the balance sheet and cash held at Horizon Kinetics and other vehicles, FRMO possesses meaningful dry powder. The company also has creditworthiness and could, if the opportunity arises, finance an acquisition of a significant scale. This issue has been brewing for some years, but either the right opportunity has not surfaced yet, or the price has not been right. At some point, the opportunity arises, and they pull the trigger.
There are 44,022,781 shares of FRMO outstanding, but only 13.5 million are unrestricted and part of the float.[2] A large part of the float is held by the founders who have little or no intention of selling. The optionality of a potential value creation that a significant acquisition might bring is not factored in the price of FRMO. “If you want to be on time, you have to be early.”
[1] https://reports.adviserinfo.sec.gov/reports/ADV/106096/PDF/106096.pdf