In the past, we have been very critical of the IPO process. In 2011, the Chinese technology firms soared 100% above the IPO range and left initial public investors with considerable losses in a few months. In 2012, the social media stocks blew up after investors in the public markets paid considerably above the IPO price. In both cases, the IPO process signaled the top in these hot sectors leaving the public holding the bag as the insiders exited the firms.
Now GSV Capital Corp (GSVC) allows regular investors to participate in the potential insane gains of the IPO process. Instead of needing millions of investment capital, GSV allows investors to "hire" a management team to scout out the top private investments and diversify the risk via 40+ companies.
As a step back, GSV or Global Silicon Valley is a business development company launched in 2010 that allows investors in the public markets to own VC-backed private companies. In essence, since small companies aren't going public, a firm went public to attract investment dollars for the private firms.
The stock jumped to $21 back in early 2012 as investors became overly excited regarding investments in Facebook (FB) and other social media stocks. The stock provided investors without access to private markets with the ability to buy a supposed once in a lifetime position in Facebook. Unfortunately for those investors, the stocks of both GSV and Facebook plunged during the summer as the luster over those IPOs exploded.
Considering the late investment in Facebook and the limited position size, one has to wonder if investors really know what GSV holds.
A major reason the need has popped up for an investment vehicle such as GSV lies in the primary examples of the social media stocks that bombed after going public. These stocks are going public much later than the past and provide very limited growth at the valuations obtained in the public markets. Facebook is now worth nearly $60B leaving limited upside for a new investor.
The largest portfolio stock provides another example, as Twitter is valued at roughly $9B already. Assuming the stock obtains a higher valuation before going public, limited value will be left for investors in the public market.
As highlighted in the below graph from the latest GSV presentation, the structure has changed dramatically since 2000. Due to SOX compliance costs, limited investment research, and investor demands for longer histories, companies aren't going public until considerable growth has already been achieved.
Another issue is this huge valuation multiples of recent tech stocks even outside the social media bombs. Palo Alto Networks (PANW) and Splunk (SPLK) trade at over 10x revenues with huge price jumps over the initial pricing of the IPO. All of those gains before the initial trading price benefited the VC funds that bought early and the large funds able to get allotments at the IPO pricing. Very few cases exist where the individual investor obtained favorable pricing on an IPO in the last few years.
While the hysteria over investments in Facebook, Groupon (GRPN), and Zynga (ZNGA) had a dramatic impact on the stock, those holdings account for a relatively small portion of the existing investments. In reality, the Twitter investment doubles the value of those three public stocks. Of course, the detractors on GSV will insinuate that as a social media play, Twitter is bound to be a disaster as well.
Besides the nearly 14% position in Twitter, the company has large stakes in Palantir Technologies, Violin Memory, Dropbox, and Chegg.com. Below, the presentation from August highlights the top 10 positions at that point:
As of September 30th, the Facebook position had dropped to less than $7M making it hardly worthy of consideration when investing in GSV. Groupon and Zynga combined for less than $2M.
The top 3 companies of Twitter, Palantir Technologies, and Violin Memory combine for roughly $70M of investments. Anybody buying the stock should focus more on these three stocks than the aforementioned social media problems.
Twitter - A top social media play, the company owns 1,835,600 common shares and 65,000 Preferred shares, Series A worth an estimated $36.1M as of September 30th. GSV expects Twitter to grow revenue 150% in 2012.
Palantir Technologies - The company owns 7,045,690 common shares and 326,797 preferred shares, Series A of this cyber security firm for a total investment of $20M. GSV projects Palantir to grow revenue by 120% in 2012.
Violin Memory - The company owns 800,000 preferred shares, Series B and 1,666,666 preferred shares, Series D as of September 30th. The total investment of nearly $15M in this solid-state drive (SSD) flash memory maker is expected to grow revenue 300% in 2012. The company could be the next Fusion-Io (FIO). With demand for SSDs accelerating and the sector ripe for investment ideas, Violin could be a very hot IPO in 2013.
At the end of Q3, the company had a NAV of $13.45 that vastly exceeds the current market price of $8.38 at the close on Monday. Amazingly, the stock traded below $7 back in November as Facebook plunged to sub $20 levels. Ironically the stock market in general remains strong suggesting that investors are extremely focused on the social media stocks and not the top stocks in the portfolio.
The company values the portfolio of holdings at only $217M versus the costs of $224M. At the least, it is clear that the company isn't padding the NAV with questionable portfolio gains.
The below chart shows how the NAV has swung between above and below the stock price since the April 2011 IPO:
Clearly no guarantee exists that the NAV won't shrink or that the stock price will ever catch up to the current NAV. It could remain below NAV for years.
After the debacles of the social media positions, a huge key for the stock price will be the ability to exit positions in a profitable manner in the future. After all, what good is a big IPO pop if the company can't exit the stock for months after the IPO as the stock plunges? Especially considering the company isn't obtaining early-stage VC prices.
The company had the ability to exit the Groupon position on June 1st when the stock was closer to $10 so clearly a stronger exit strategy is needed. The shares in Facebook were unlocked on November 14th making an investor wonder why the company hasn't exited the position or why it invested at such a high valuation in the first place.
As mentioned above, the stock trades at an extreme discount of nearly 38% to NAV. The stock would need to jump over 60% to reach the NAV. The below chart highlights how GSV is trading close to all-time lows making the stock very attractive at these levels.
20-Month Chart- GSV Capital
Investors in GSV Capital should appreciate the level of risk involved with investments in private firms. Fortunately though, a new investor gets to purchase this stock at a considerable discount to NAV. The company has several investments in the top holdings that could pay off considerably.
Any small investor interested in the IPO market should consider an investment in this stock instead of buying IPO shares in the after market. Not only does GSV trade at a discount, but also the typical IPO stock these days trades at a premium.
Buy GSV to obtain private market valuations instead of chasing in the after market. The stock will likely remain low until the company is able to show it exited a position at considerable gains. Until then, investors can buy up shares on the cheap knowing the market is missing an extreme value.
Additional disclosure: Please consult your financial advisor before making any investment decisions.