While the IPO of Silver Spring Networks (SSNI) should portend well for the valuation of GSV Capital (GSVC), its stock has plunged since Silver Spring went public last week. The IPO'd stock was supposedly one of the weaker holdings in the portfolio of private companies owned by GSV Capital, yet it surged beyond the offering price.
GSV Capital was established at the start 2011 to cater to investors in the public markets that wanted access to private firms. With limited positive outcomes on existing investments, the public markets are having a difficult time determining if GSV Capital provides a suitable investment vehicle.
Two main issues exist that need further exploring: high costs of management fees and limited investments trading above costs.
Silver Spring IPO Details
Silver Spring Networks had been one of the biggest losers in the GSV Capital portfolio. The company spent over $5.1M investing in the private maker of smart grid products and watched the fair value drop to below $2M as of the end of 2012.
Along came the IPO in early March allowing for another view of the valuation potential in the GSV Capital model. After the negative outcomes on Facebook (FB), Groupon (GRPN) and Zynga (ZNGA) in 2012, the company could use a turnaround story to help the stock price. Well, Silver Spring isn't exactly the best answer to that issue.
As IPOdesktop outlined in the IPO review, the company isn't knocking it out of the park and struggled to finish the IPO. If anything, the opinion of that firm is that the stock is overvalued at the offering price of $17. Read the full report for more details on the stock and the prospects.
More importantly for GSV Capital is that the stock soared to $22.50 on the first trading day and now trades around $20.5. While not a huge homerun for the company considering the $19.40 fair value listed at the end of 2012, it does stem the losses from one of the companies written down extensively in Q3 and Q4. Now the question is when will the company unload the stock. The exits for Facebook, Groupon, and Zynga are still pending and clearly not fast enough.
GSV Capital Value
The stock has a fair value of $13.07 while it trades for a meager $8. It would have to jump 62% to reach fair value. This leads the discussion to the two primary issues: high management fees and limited investment gains in the portfolio.
Management fees and costs are a major concern as it continues to eat away at the NAV. The total operating costs for 2012 were $8.5M or roughly 3.3% of the current NAV. Until the company starts showing investments with huge gains, those fees are going to be brutal to absorb each and every quarter.
The bigger issue is the lack of major investment gains after two years of running this venture capital based BDC. Sure Twitter, Violin Memory, Dropbox, and Palantir Technologies have homerun potential, but until the market sees a big gain it will focus on all the losers.
Right now, Violin Memory appears the next test of the homerun potential for this concept. The company has been rumored as ready to test the IPO markets with its fast growing flash memory storage products. GSV Capital though values the $14.8M investment generally inline with costs. If revenues of the core holdings are growing 100% per annum, why are the investments mostly valued around costs? Has the company overpaid for all the holdings?
In the case of Twitter, the company mentions the fair value is based on it being recently valued at around $9B. Considering the potential of Twitter, a valuation of $30B wouldn't be unheard of in the current climate. That alone would add $72M to the NAV or about $3.73 per share. Naturally that would pump up the stock again, but until GSV Capital cashes out of a big score such as the hypothetical potential of Twitter the stock will remain an extreme value.
The weakness after the earnings report is perplexing considering the steep discount to fair value that exists. Investors clearly question that valuation and the Silver Spring IPO should help legitimize the numbers. The stock though as been plunging too new lows setting up a potential re-test of the sub-$7 lows. Once it rallies , it could be spring-loaded back to the $20 level with limited overhead resistance. See the chart below:
1-Year Chart - GSV Capital
The concept of investing in private companies via a public vehicle is off to a rocky start. Clearly, GSV bought too many positions when the private market was expensive due to the social media hype. Luckily though, the top positions in the fund appear potential homeruns that could lead to significant gains in NAV that already sits substantially above the stock price.
The Silver Spring IPO portends well that the valuations on the books are solid and if anything it might highlight that the weak stocks were written down while the strong ones sit around costs due to limited pricing information. Small investors should look into one of the only options to buy shares in Twitter on the cheap while it lasts.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.