- SVVC is trading at a 22% discount to NAV.
- It settled a proxy contest with an activist fund (Bulldog Investors) and will return approximately 24% of NAV to shareholders via buybacks and distributions.
- Buybacks and distributions to be funded via cash on hand and liquidating publicly traded securities in its portfolio.
- Minimal downside (8%) and very attractive upside (20% in 9 months or sooner) via buybacks, distributions and compression of the spread between the market price and the NAV.
About the company
Firsthand Technology Value Fund (NASDAQ:SVVC) is a publicly-traded venture capital fund that invests in technology and cleantech companies. Its net asset value (NAV) is approximately $242 million, comprising: 22% in cash, 15% in shares of Twitter (NYSE:TWTR), 15% in shares of Facebook (NASDAQ:FB), 10% in privately held IntraOp Medical, 6% in privately held Turn Inc., 4% in privately held AliphCom (Jawbone) and 28% in other privately held companies.
Although it is a closed end fund, it has elected to be treated as a business development company under the Investment Company Act of 1940. In addition, for tax purposes SVVC has elected to be treated as a regulated investment company (RIC). In general, a RIC is not taxable on its income or gains to the extent it distributes such income or gains to its shareholders. See the 10-K for details.
SVVC's NAV per share is approximately $26.72 based on current prices for its two publicly traded securities and cost basis for its privately held securities. The last traded price ($20.97) is at a significant (22%) discount to the NAV.
Activist investor settles proxy fight and wins significant concessions from management
Bulldog Investors (Bulldog) owns 14% of the outstanding shares of SVVC and is the largest holder. Bulldog is an activist fund focused on closed end funds. It agitates for management to take steps to narrow the discount to the NAV. Phillip Goldstein is the founder and owner of Bulldog.
Bulldog has been trying to get SVVC management to be more shareholder friendly and to actively work to narrow the wide discount that the stock trades at relative to its NAV.
On May 2, 2014, SVVC entered into an agreement with Bulldog to settle the proxy fight. Under the terms of the settlement, Bulldog has agreed to (1) withdraw its two nominees for the Fund's Board of Directors, (2) withdraw its proposals regarding ((i)) termination of the Fund's Investment Management Agreement and (ii) consideration by the Board of a share repurchase program, (3) not present any proposals at the Annual Meeting, and (4) vote its shares in accordance with the Board's recommendations.
The settlement also provides that the Fund's Board approve a plan for the Fund to repurchase up to $10 million of common stock in open market purchases during 2014, and to conduct a self-tender offer for at least $20 million worth of common stock at 95% of net asset value to be completed no later than January 31, 2015. Further, the Fund has agreed to liquidate its Facebook and Twitter holdings no later than September 30, 2014 and October 31, 2014, respectively, and to distribute any net realized gains from those holdings to shareholders within 60 days of completing those liquidations.
Valuation: 20% upside in 9 months; 8% downside
I Upside: $25.19 = +20% in 9 months or sooner
1. Current stock price: $20.97
2. Current NAV: $242 million ($26.72 per share)
3. Current number of shares: 9.07 million
Assumptions (based on agreement with Bulldog detailed earlier):
1. Share buyback of $10 million is at a 5% premium to the current stock price
2. Self tender of $20 million is at 95% of the post-buyback NAV of $26.92
3. SVVC's cost basis of FB shares: $31.59
4. SVVC's cost basis of TWTR shares: $17.05
5. FB and TWTR shares are sold at the current market price of $60.47 and $34.76 respectively. 20% of the realized gains are paid as performance fee to the managers and the balance $17 and $14 million respectively is distributed to shareholders
6. Stock trades at a 5% discount to the NAV after the buyback, self tender and distribution of the net realized gains.
II Downside: $19.25 = -8%
Assumptions (points 1 to 4 same as detailed in the upside section above):
5. FB and TWTR shares are sold 20% below the current market price of $60.47 and $34.76 respectively. 20% of the realized gains are paid as performance fee to the managers and the balance $10 and $10 million respectively is distributed to shareholders
6. Stock trades at a 25% discount to the NAV after the buyback, self tender and distribution of the net realized gains.
Management is pursuing shareholder enhancing transactions only after being forced to do so by an aggressive activist fund. Even with the agreement, management may delay implementation or may not optimally implement the transactions to the detriment of shareholders. This risk is partially mitigated with the continued presence of Bulldog as the largest shareholder and the threat of legal issues and another proxy fight next year if the agreement is not properly implemented.
The proxy fight settlement includes a series of shareholder friendly transactions, which will eliminate or significantly narrow the wide (22%) discount that the stock trades at relative to the NAV. Expected return is 20% over the next nine months or sooner, with approximately 24% of the NAV being returned to shareholders via buybacks and distributions. The wide current discount ensures that even if the underlying securities fall 20% (after having fallen 15% to 28% over the last approximately 2 months), the downside for SVVC shareholders is approximately 8%.
Disclosure: I am long SVVC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: KL Investment Partners may change or exit its position (buy or sell shares) without updating this article and without informing the Seeking Alpha community