Jefferson Capital, Illiquid, Controlled, but Overly Discounted to Peers
Part 2: A-Z through every Minnesotan company
Jefferson Capital (NASDAQ: JCAP) is a newly public, private-equity-controlled purchaser of charged off consumer debts, headquartered in Sartell, MN. It IPO’ed June 28, 2025 (at a tough time for subprime finance companies). JCAP has strong balance sheet discipline, excellent cash flows, and a business model that historically benefits from recessions. At a 20% levered cash flow yield, and a 39% YoY operating income growth rate, it appears to be very fairly valued - even when considering its control situation, and recognizing that accounting profitability in the industry is volatile and purchase-cycle dependent.
About the Business
Jefferson Capital is a consumer finance company specializing in buying and collecting distressed, non-performing and defaulted consumer debts. Once a bank charges off loans they deem as uncollectible, Jefferson capital can buy that loan book and start collecting. Historically they buy loans from financial institutions at 3-5% of face value, and profit by recovering more than they paid for the loans - through settlements, payment plans and legal collections. On average past vintages have yielded a 3x return on their invested loan book.
Attractively priced vs. peers
Peer U.S. publicly traded debt buyers are Encore Capital (ECPG) and PRA group (PRAA). JCAP trades at price to levered free cash flow multiple with lower leverage and higher liquidity to peers.
Reason 1 for Mispricing: Governance and Ownership
JCAP is incorporated in Delaware and is a Nasdaq “controlled company.” Approximately 67% of the equity is owned by J.C. Flowers affiliates, a private-equity sponsor focused on financial services. J.C. Flowers controls the board and vote, and we can expect capital allocation decisions to optimize sponsor economics and liquidity first. For example, dividends will be prioritized over buybacks.
Mitigant: Management is long tenured with the company and well experienced in the industry. I found no major instances of fraud, blowups or accounting issues. This team has survived multiple market cycles through 20 years.
Public buyers are the company’s exit liquidity. That doesn’t mean that this is uninvestible, but it is something to be aware of. Notably, the insider lock up period for stock sales ended December 23, but no sales have occurred.
Reason 2 for Mispricing: Stock Illiquidity
JCAP trades at roughly a $3M/day average in dollar volume, which is too small for large institutions, funds and benchmarked managers. So, institutional demand is constrained, sell-side coverage is limited (2 analysts are covering this now), price discovery is inefficient and mispricings are more likely.
Summary
JCAP yields equity owners 20% on their investment, and has grown 39% YOY. An underpricing is supported by the fact that it appears to be trading at a 50% discount to peers, even with higher growth, less corporate level debt, and better corporate debt capacity. During a downturn, it would appear to be well positioned to buy loan books at attractive prices. The reason for the low price - majority PE control, should dissipate in 2-3 years as JCP sells out of its position. As this happens, share liquidity should improve as more buyers are eligible to own JCAP. Over the long run, the benefits appear to outweigh the risks.
Disclaimer: The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.
I do not hold a position in these securities.