A self-taught hedge fund manager who's returned 16%-plus annually to investors since 2012 shares his 'special situation' strategy - and a stock that makes up 39% of his holdings

Steven Kiel

• Steven Kiel - the self-made founder and portfolio manager at Arquitos Capital - leverages a special situations approach to investing that features hyper-concentrated positions.
• He says he looks for companies in transition and to maximize specific situations while minimizing externalities.
• Kiel has returned 16.9% annually after fees to shareholders since Arquitos' inception in 2012.
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Steven Kiel, founder and portfolio manager at Arquitos Capital, started his fund with one employee: himself.

"I always was interested in things like this," he said on "The Acquirers," an investing podcast. "Going back to even before I graduated from law school, as a personal investor, I was always interested in niche things and idiosyncratic things."

Before Kiel carved out a career as a hedge fund manager, he spent time consuming timeless lessons from the legendary investors that came before him. Books like: "Buffett: The Making of an American Capitalist" by Roger Lowenstein, "Margin of Safety" by Seth Klarman, and "You Can be a Stock Market Genius" by Joel Greenblatt were extremely influential throughout his journey.

When it came time to open his own fund, Kiel had his strategy figured out. He'd focus on special situations.

"Special situations can mean a lot of different things," he said. "I'm looking for companies in transition. I'm looking to maximize company specific situations and kinda minimize external things."

Those special situations include: spinoffs, mergers, bankruptcies, restructurings, and recapitalizations, among others.

"It depends on each situation, but you're really looking for something that's company specific that has less risk and less variables outside of the company," he said. "Really something specific as to what's going on, where management has control over the situation and can control the variables."

To source new ideas Kiel has a number of SEC alerts set up. S-1 filings, S-3 filings, employment agreements, contingent value rights, rights offerings, and tender offers all garner extra attention.

In addition to sniffing out a special situation, Kiel employs a "balance-sheet-to-income-statement investing" approach.

"I want to buy when the balance sheet is strong, when it's reasonable priced, when there is something specific going on at the company that might unlock that value over time," he said. "And then there's a transition that would be made to reinvestment opportunities, predictable free cash flow generation over time."

Read more: 110 units and retired at 36: How a former Clemson football captain went from '$1,000 and my car' to a successful real-estate investor

Kiel relayed his portfolio's largest position - MMA Capital (MMAC) - as a prime example of this methodology and thinking. Currently, MMA Capital makes up about 39% of his holdings. In totality, Kiel says that his top five positions make up about 75% of his total portfolio.

"It's made the transition from this balance sheet type of approach - reasonable valuations - to now it's transitioned into the income statement predictability," he said. "Other investors haven't really realized it yet."

Due to an array of off balance sheet assets, stock buybacks of about 10% of the company's value per-year, and swaths of insider ownership, Kiel says that the book value of MMA Capital has been growing each year.

"They were transitioning into another type of business," he said. "They were a specialty asset manager, and now their primary business is much different than it was 5 years ago."

Today, Kiel says that MMA Capital's primary business is a solar lending fund.

"They'll likely throw off $6 a share next year just from the returns from the solar lending fund, trades at $32, book value is $37 and change," he said. "And so it took several years for it to create that predictability, but now you're there."

Ultimately, this confluence of special situation and balance-sheet-to-income-statement investing has handsomely reward Kiel. Since his firm's inception in 2012, he's achieved 16.9% net annualized returns.

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