We've known Keating Capital (KIPO) for at least two years and hold Tim Keating in high regard. Like many potential investors, we have been bamboozled by "business development companies" in terms of growth and valuation.
Look no further than this exhibit to note the spread that has opened up between KIPO NAV and the share price:
Of course, these companies are financial in some ways and have a calculated net present value (NPV), but some, like Keating and also Harris and Harris (NASDAQ:TINY), invest in emerging and high growth companies. The value of their investments is growing and will fuel increases in NPV over time. Yet these companies tend to trade very close to their NPV, often at a discount. There is little, if any, "future value" ascribed to them. (There are exceptions to this rule as when GSV Capital (NASDAQ:GSVC) was bid up on the Facebook (NASDAQ:FB) IPO hype.)
We revisited KIPO the other day because we were looking into what turned out to be one of its portfolio names, Tremor Video (NYSE:TRMR). We're not sure if TRMR is going to mount a big recovery from here or not, but once we started looking at the KIPO portfolio, some other names boosted our interest. For example, TrueCar (5.1% of KIPO net assets) has filed for an IPO. We've completed research on TrueCar and think this one will add significant value to KIPO's NAV as a public company.
There are others as well, like Metabolon in medical diagnostics that we know well and think has a strong chance of succeeding. BrightSource Energy failed to get its IPO done, but we still think that in some locations its approach to solar can be adopted. Keating has a number of other positions that touch online commerce, gaming, sustainable energy and software.
Of course, there are losers and a few very unproven companies. And, as far as we can tell with respect to TRMR, Keating is under water with a cost basis of $6.67/share. However, in aggregate it looks like more winners than losers and a foundation for expanding NAV and/or increased dividend distribution in future quarters.
Speaking of distributions, the company has a policy to distribute gains as evenly as possible. For 2014, this means $0.10/share for the first three quarters and a final dividend based on actual results. If we assume another $0.10 for December, that would be a yield of almost 7%.
The real kicker here is that NAV, as of December 31st, was $7.65/share and shares of KIPO are trading at $5.94. (Keating will be updating its NAV for the period ended March 31st, 2014, soon and we expect it to be down but only slightly.) The key to the story remains NAV expansion in the next few months.
So, rather than play a potential turn around in TRMR (or MM for that matter), it probably makes more sense to take advantage of the discount to NAV that KIPO offers, and accept the dividend and a potential increase in NAV as icing on the cake.
To sum up, we see a stock trading at a 33% discount to NAV, with a good dividend policy and yield, run by someone we know is a very smart and capable CEO, with a portfolio of investments that we think will appreciate in the next 12 months.
KIPO may not offer the same upside as a successful turnaround at a company like TRMR, but on a risk-adjusted basis is probably a better investment for many.
A few clients have voiced their support for GSV Capital which also trades at a big discount to NAV right now. We wouldn't talk anyone out of GSVC at this price but just feel that the company has been less shareholder friendly in terms of policies and payouts. It should still rise once perceptions of a "closed IPO window" subside.
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