In May, I initiated a private position in Firsthand Technology Value Fund (SVVC) for the following reasons:
- I have known Kevin Landis for about 20 years, and believe that he is at the top of his game. He has invested in technology through several cycles, and is a knowledgeable investor. Recently, he has added a strong board member - Mark Fitzgerald - who was a leading semiconductor equipment analyst on Wall Street for several years. Earlier this year, Firsthand and the Quan Technology Fund invested in a company called Pivotal Systems. While it is too early to take the victory lap, the risk-reward tradeoff for this company is extremely attractive. As a co-investor with Kevin as well as looking at other deals together, I walked away impressed with his savvy negotiating skills (including strong legal support), his industry network, and ability to get to the essence of an investment opportunity.
- The fund has certain positions valued at cost, which appear ripe for a revaluation. Twitter, the fund's second-largest position at 10% of NAV, is certainly a substantial revaluation candidate, with the catalyst being a probable IPO in 2014. In addition, Pivotal Systems (3% of NAV), among other private holdings, is conservatively valued at cost, despite very low valuations and free warrants that were attached if operating milestones are not reached.
- Firsthand's evergreen structure provides an advantage over typical venture competitors with limited-life funds. Firsthand's longer time horizon better matches the evolution of its portfolio companies, leading to more natural exits and less fireside sales/missed opportunities.
- I actually like the fact that the fund has a large cash position. Kevin is a disciplined value investor that does not overpay. The current market has become frothy in both the private and public equity domains. As Firsthand is an absolute return fund without benchmark constraints, Kevin is not forced to rush into suboptimal stock purchases. Hopefully, he can patiently wait for the right investment at the right price.
- The fund was trading at a substantial discount to NAV of around 18% in May, and is still at a 10% discount today (based on a current price of $23.32 and August 2013 NAV of $25.80). These discounts to NAV are even more compelling considering that 52% of the fund is in cash.
- Thus, Firsthand's high cash levels provide substantial downside protection in case the market goes south, while attractive holdings provide upside. Furthermore, Kevin has some dry powder to take advantage of a future market sell-off.
Activist investors such as Bulldog Investors recognized the value derived from Firsthand's significant discount to NAV with extremely high cash levels. Bulldog may have even been one of the catalysts in narrowing the NAV discount to 10% today from previously wider discounts, and currently owns 10% of the fund.
Bulldog needs to realize a profitable exit from its large Firsthand position. Bulldog's stated preference would be for Firsthand to buy back shares at a 2% discount to NAV. Bulldog has become frustrated that Kevin Landis has not responded to its demands. Subsequently, Bulldog participated in a recent Seeking Alpha interview in an effort to either fire Kevin and/or force him to negotiate. I would like to address some misconceptions stated in italics from the above-mentioned article:
- He lost over 80% of the fund's asset value over a 13-year period, and that's pretty awful. This is statistical fallacy of finding the worst starting point possible in order to support a view. Taking the starting point of the peak Nasdaq valuation before the bubble burst ignores the exponential gains Kevin achieved before 2000, as well as ignoring the 44% gain over the past year.
- We see a fund with a pile of cash and exorbitant fees. I mean Kevin is getting 2%. Venture and crossover funds traditionally get at least a 2% management fee and 20% performance fee. Firsthand is not any different from other venture and crossover funds. The fact that two of Firsthand's holdings - Facebook (FB) and Twitter, were initially purchased in the secondary market, does not justify a below-average management fee.
- With these companies, when they're private, you have no access to their financials. Not true - a venture investor like Firsthand signs an NDA if needed, and has complete access to private companies' financial information.
- Now, I'm not talking about a real venture capitalist, where you actually have some influence and control over management or upon the board, you know what you're getting into and actually getting your hands dirty. Not true - Firsthand sits on the boards of several private companies in its portfolio, and works closely with those management teams on an ongoing basis. This is a time-consuming effort, which is one of the reasons that VC's such as Firsthand charge a 2% management fee.
Publishing the above questionable statements is a means to an end. Firsthand investors should realize this, so that they can make an informed decision in case there is a proxy fight.
On the other hand, Bulldog has a valid point in stating that current cash levels are too high for a publicly-traded company. That said, large amounts of cash need to be set aside for i) future investments, ii) existing private holdings requiring cash for follow-on investments, and iii) reserves for future fund costs. Bulldog may have recognized this reality by offering a carrot as well as a stick to Firsthand by stating it would accept a 25% fund stock buyback (i.e. $3M in fees instead of $4M).
Only time will tell what the outcome will be. But as a long-term investor, I hope that Kevin Landis and his team continue to manage the Firsthand Technology Value Fund.