In the world of finance, there existed a holding company called Icahn Enterprises (IEP). This company was led by the infamous corporate raider and activist investor, Carl Icahn, and his son, Brett. With an impressive market capitalization of around $18 billion, IEP seemed like a force to be reckoned with.

However, beneath the surface, there were some troubling revelations brought to light by Hindenburg Research. They discovered that IEP units were inflated by over 75%, driven by three key factors. Firstly, IEP was trading at a whopping 218% premium to its last reported net asset value (NAV), far higher than any comparable company. Secondly, there was clear evidence of inflated valuation marks for IEP’s illiquid and private assets. And lastly, the company had suffered additional performance losses following its most recent disclosure.

It was quite unusual for closed-end holding companies to trade at a premium to their NAVs. In fact, most of them traded at a discount. For instance, other renowned managers like Dan Loeb’s Third Point and Bill Ackman’s Pershing Square traded at discounts of 14% and 35% to NAV, respectively.

Hindenburg decided to dig deeper and compared IEP to all 526 U.S.-based closed-end funds (CEFs) in Bloomberg’s database. The premium to NAV for Icahn Enterprises was higher than any other fund, more than double the next highest they found. Additionally, Icahn Enterprises boasted a current dividend yield of approximately 15.8%, which was the highest among any U.S. large-cap company, with the next closest yielding only around 9.9%.

The situation became even more alarming when it was discovered that IEP’s annual dividend rate represented an absurd 50.5% of its last reported indicative net asset value. This raised concerns among investors, as the company’s financial performance had been consistently negative. Despite these negative numbers, IEP had managed to raise its dividend three times since 2014. In 2019 alone, IEP’s free cash flow was negative $1.7 billion, highlighting the company’s dire financial situation.

To sustain its dividend payouts, Icahn Enterprises had resorted to selling IEP units through at-the-market (ATM) offerings. Since 2019, they had sold a staggering $1.7 billion worth of units to fund their dividend obligations. This strategy seemed questionable at best, as it resembled a Ponzi-like economic structure, relying on new investors’ money to pay dividends to existing investors. It was a dangerous game that relied on the continuous influx of new funds, with the risk of collapsing if investors became hesitant and refused to “hold the bag” as the last ones in.

As news of these troubling findings spread throughout the financial community, investors grew increasingly concerned about the sustainability of Icahn Enterprises’ operations. The once highly regarded company was now viewed with skepticism, as its financial practices raised doubts about its long-term viability.

The story of Icahn Enterprises serves as a reminder that even in the world of high finance, where giants roam, no company is immune to scrutiny and the consequences of questionable actions. As the situation unfolded, it became clear that IEP would have to address these concerns and take appropriate measures to regain the trust of its investors and the financial market at large. Only time would tell whether Icahn Enterprises could weather the storm and emerge stronger or if its lofty reputation would crumble under the weight of its own financial missteps.