Investors in hedge funds, private equity firms, start ups and even some public companies often need to be aware of ‘Key Man’ risk. This refers to the over-reliance on or importance of a few select individuals (or even just one) to the business. Think Warren Buffet and Berkshire Hathaway (no matter what he says).
About a year and half ago we wrote about Contago Oil & Gas’s (MCF) spinoff of Contango Ore (CTGO), a company with mining rights to 750,000 acres in Alaska. After some promising initial studies, the company hoped to find gold or rare earth metals on the property. As we noted, this is a pretty speculative venture, but one which drew quite a bit of interest due to the involvement of Contango CEO Ken Peak who also became Chairman & CEO of CTGO. Mr. Peak has quite an impressive backstory and track record and the fact that he was personally taking charge was quite a vote of confidence. In fact, Mr. Peak recently invested $4 million of his own money in a private placement this past March to fund this year’s operations at a price of $10 per share. His share of the placement represented close to half of the total offering and now Mr. Peak owns over 24% of the company’s shares.
Unfortunately, Mr. Peak has since fallen ill and is now taking a medical leave of absence for up to six months. Mr. Brad Juneau, manager of Juneau Exploration’s GP, was named CEO and Chairman in the meantime. While Mr. Juneau has some experience, this move is hardly reassuring to investors. In fact, CTGO (and MCF) dropped precipitously on the day of the announcement as Mr. Peak is considered quite vital to the operations. A classic ‘key man’ situation. Without Mr. Peak there are serious concerns as to whether or not the company can continue to raise the necessary capital in order to operate. While 2012 was covered by the private placement, there are no guarantees for 2013. Will he be able to kick in more of his money and will investors still be willing to invest if he isn’t involved? An already highly speculative investment just became much, much riskier.
While we wish Mr. Peak a speedy recovery, I would be very concerned if I were a shareholder. Unfortunately, it is not easy to unload this name as it is extremely thinly traded and a sizeable percentage of the shares are controlled by insiders.
Disclosure: Author is long shares of Berkshire Hathaway (and no, not ‘A’ shares).