In a previous article I mentioned that what GSV Capital (GSVC) needed to close the NAV gap was more credibility in its private portfolio valuations and could increase this by having a higher percentage of its portfolio become tangible on the public markets. Today we are at an all time high with 3 public companies in the portfolio (Facebook (FB), Silver Springs Networks (SSNI) and Control4 (CTRL)) resulting in a higher percentage of the portfolio having more transparency in its valuation. At the close of Q2 7.5% of the portfolio could be traced to publicly traded shares. At the time of this writing it is closer to 12% due to increased share prices from all 3 companies. Considering that the year started with just 3.5% due to Facebook you can see that the dynamics of the portfolio are changing.
Reading between the lines
CEO Michael Moe addressed the Twitter valuation during the Q&A for Q2's earnings report in which he said:
...I will say that we certainly don't want to be accused of aggressively marking something up. And I just say that because our reputation is really important for us obviously and it's important that we do everything to get what we call kind of the realistic value. That all said, clearly when you look at both what's going on with Twitter as a business fundamentally, what's going on in the marketplace - I made the reference to the other publicly traded fund which owns Twitter which has got it marked up $3.00 above us, and certainly I'm sure they have a very appropriate reason for doing that. We just think where we've got it is the correct place to be right now...
What is being referenced in this statement is the Firsthand Technology Value Fund (SVVC) which also holds Twitter as its top holding as well as a position in Facebook, each with about 10% in weight. The above statement was basically a proclamation to shareholders that you can have faith that the GSVC valuation process is a conservative one in comparison to its peers.
By adjusting the GSVC Twitter holding to reflect the same valuation that SVVC uses I calculate that GSVC holds potentially an additional $5.8 million. At this valuation and using the current share prices of the 3 public companies the NAV is lifted by about 5.5% to $13.60 and I have the portfolio allocation of top companies looking a little more like this:
Another interesting read was that Chegg, the textbook rental company, has recently filed paperwork for an IPO. Revenue has been growing year after year. However, the company has never been profitable. One major threat to Chegg is the digitization of textbooks, which to their credit they have been evolving, but the core business model is under attack by textbook publishers. Publishers are seeking to churn out newer editions more frequently which leaves Chegg with a growing inventory of obsolete textbooks. Looking at the first half of 2013 Chegg spent $42 million acquiring new textbooks and $21 million liquidating old textbooks. The company has potential to be profitable and to be a success for GSVC but there is no certain outcome at this point.
Realizing a way to a dividend
To date no dividends have been paid out by GSVC. This is because it hasn't realized any gains on any of its investments. GSVC is structured to pay out 90% of its gains offset by losses in the form of a dividend. Starting in 2013 the losses on Groupon (GRPN) and Zynga (ZNGA) were realized and removed from the portfolio much to the chagrin of shareholders. In the Q2 filings it was revealed that other losses realized were the complete loss on Top Hat 430 which filed for Ch 7 bankruptcy protection in March, Serious Energy which had also been held at a worthless value for some time, and the newly announced failure of an investment in AltEgo which was at a cost of $1.4 million, bringing the total net realized loss to $9.67 million.
Looking at the public companies in the portfolio at today's valuations FB shares can be sold at a $2.5 million gain. SSNI will become available for sale in one month but at current valuation represents a $2.7 million loss. The shining star is CTRL which can't be sold until early 2014 but currently carries a $9 million gain. What this tells me is that we're most likely looking at a realized loss for 2013. The question management must answer is do they want the blemish of a 0-5 scorecard on realized failed investments for 2013 or do they want to unload some or all of the FB shares? The SSNI shares trading a loss will most likely be sold in 2014 in hopes of breaking even or at very least using some of those losses to offset the CTRL gains.
...We've said it consistently, we know that we're not being paid to manage a portfolio of public companies. We also aren't looking to sell shares that we think are significantly undervalued. Facebook obviously has had a huge move and we think by the way the fundamentals for Facebook are outstanding as we look ahead. And I think what you'll see us do is to execute on kind of smart portfolio management as it relates to Facebook in the short to intermediate term just because we think that's the appropriate thing to do with the strategy that we have.
One thing on many investors mind is what happened to all that cash and what does that mean for the future. At the end of Q1 there was $16 million in a money market account which has all since been removed. $10 million went to buy Coursera, the education technology company. Two smaller investments totaling $1 million went into Jawbone, the speaker accessory and technology company, and oDesk, a LinkedIn (LNKD) for freelancers. As far as existing portfolio companies $1.7 million went into Zocdoc the recent quarter, $1.4 million into SugarCRM, and another million into Solexel, DailyBreak, CUX and Always On.
With an admittedly low cash reserve what can be done? A secondary offering "at current prices" is off the table according to management but many investors are speculating on a possible debt offering. The ideal and most shareholder friendly option would be to unload the public companies. If the entire position in Facebook or Control4 was closed it'd leave enough cash on hand to put investors minds at ease. My gut tells me the Control4 position will be closed in its entirety while I'm a believer that the Facebook position will be managed more carefully and a small position may remain indefinitely. This is pure speculation but from the conference calls it is clear that although management doesn't want to be a portfolio of public companies that they do think Facebook has long term value. Now imagine a post-Twitter-IPO world after GSVC's lock up period has expired - will it close the entire $40+ million position?
Although it seems like the story for GSVC is changing it really is not. The marketing of this fund harks back to the title of CEO Michael Moe's book "Finding The Next Starbucks." The reason why most people invest in GSVC is because of Twitter. Before that it was Facebook. Big names are needed to attract attention. I think that we'll see that as GSVC exits from the majority (if not entirety) of its position in Facebook and eventually Twitter and begin to pick up shares in existing portfolio company Spotify. And to completely speculate I wouldn't be surprised in the slightest to see future investments in either Pintrest (social media), Square (mobile credit card processing) or possibly Soundcloud (online audio distribution). All 3 shares can be traded on SharesPost.com (which is also owned by GSVC in a 1% position), and these companies already fit into the existing investment themes of social/mobile/cloud and they all have the name recognition that GSVC needs in its portfolio to maintain shareholder interest.