BDCA Venture (NASDAQ:BDCV)
Q2 2014 Earnings Conference Call
July 28, 2014 4:00 p.m. ET
Margie Blackwell – Director, IR
Tim Keating – President and CEO
Edward Woo – Ascendiant Capital Markets
Good afternoon and welcome to BDCA Venture’s Quarterly Earnings Call being held on July 28, 2014. This call will discuss BDCA Venture’s results for the quarter ended June 30, 2014. As a reminder, this call is being recorded and will be available for replay until our next quarterly conference call, which is currently scheduled for October 27, 2014.
I’m Margie Blackwell, the Investor Relations Director for BDCA Venture. Let me remind you of the following two points. First, we issued a detailed financial results Press Release that includes all of the important financial information and metrics for the quarter ended June 30, 2014; and second, the slides to be presented during this call, which themselves contain comprehensive and detailed financial information, are posted on the Investor Relations section of our website at bdcv. com.
Now let me begin by reading our disclaimer about forward looking statements. We would like to remind you that various statements that we may make during this afternoon’s call will include forward-looking statements as defined under applicable securities laws. Management’s assumptions, expectations and opinions reflected in those statements are subject to risks and uncertainties that may cause actual results and/or performance to differ materially from any future results, performance or achievements discussed in or implied by such forward-looking statements and the company can give no assurance that they will prove to be correct. Those risks and uncertainties are described in the company’s earnings release and in its filings with the Securities and Exchange Commission.
And with that, I’ll turn it over to CEO, Tim Keating.
Good afternoon. Because of the extensive disclosure in our earnings press release, in my prepared remarks I am only going to highlight three noteworthy items for the second quarter.
First, I will discuss portfolio activity, including the IPO of one portfolio company TrueCar and an investment in a new portfolio company Centrify Corporation. Second, I will discuss the highlights of our results of operations and change in net assets. And third, I will address the currently large stock price discount to NAV and the direction from our board on this matter.
Here are the details beginning of TrueCar’s IPO. TrueCar Inc. , portfolio company, completed the pricing of its IPO of 7.5 million shares of common stock at a price to the public of $9.00 per share on May 15, 2014. The shares began trading on the NASDAQ under the ticker symbol "TRUE" on May 16, 2014.
Goldman Sachs, JP Morgan, RBC Capital Markets acted as joint book-running managers for the offering. Cowen and JMP Securities acted as co-managers for the offering.
Founded in 2005 and based in Santa Monica, California, TrueCar empowers car buyers by giving them transparent insight into what others actually paid, upfront pricing information, a guaranteed savings certificate, and a connection to a trusted TrueCar Certified Dealer to seamlessly complete the car purchase.
On September 26, 2011, we purchased 377,358 shares of TrueCar’s common stock for $7.95 per share after giving effect for a two-for-three reverse stock split before the IPO, for a total investment of $3 million. Based on a closing price of $14.78 as of June 30, 2014, TrueCar’s common stock had a value of approximately $5.0 million, after giving effect to a 10% discount for lack of marketability, representing 1.7x our initial investment cost.
Now let’s discuss the new investment in Centrify. Also on May 16, 2014, we completed a $3 million Series E convertible preferred stock investment in Centrify Corporation.
Founded in 2004, and headquartered in Santa Clara, California, Centrify provides identity management software that allows users to access data center, cloud, and mobile devices and applications with a single sign-on. According to Centrify, more than 5,000 customers, including approximately half of the Fortune 50 companies, have deployed Centrify’s software to unify their identity infrastructures and improve network security.
As of June 30, 2014, BDCA Venture was fully invested and, unless additional capital is raised or existing investments are sold, there is limited capital available to make additional portfolio company investments other than follow-on investments in existing portfolio companies.
Now let’s turn to our discussion net assets and results of operations beginning with our net assets.
As of June 30, 2014, the total fair value of BDCA Venture’s 18 portfolio company investments was $64.3 million. BDCA Venture also had cash and cash equivalents of $9.8 million or $1.01 per share. Net assets at June 30, 2014 was $71.6 million or $7.32 per share, a decline of $0.02 per share during the second quarter.
The components that typically drive the changes in NAV each quarter are: one, net investment losses effectively BDCA Venture’s operating expenses; two, realized gains/losses on portfolio company dispositions; three, the change in unrealized appreciation or depreciation on portfolio company investments, and fourth, distributions paid to stockholders or capital transactions.
During the three months ended June 30, 2014, BDCA Venture had a net investment loss—effectively BDCA Venture’s operating expenses, including base management fees and accrued incentive fees —of approximately $1.2 million, or $0.12 per share. Operating expenses, excluding base management fees of $369,000 and incentive fees of $465,000, were approximately $397,000 in the second quarter. The incentive fee expense during the second quarter resulted from a net increase in unrealized appreciation of approximately $2.3 million during the quarter.
BDCA Venture had no realized gains or losses during the second quarter since it did not dispose of any portfolio company positions during the quarter.
BDCA Venture had a net increase in unrealized appreciation on its portfolio company investments of approximately $2.3 million, or $0.24 per share, as a result of the following 3 items: one, write-ups during the quarter of approximately $5.4 million in eight portfolio companies; two, write-downs during the quarter of approximately $3.1 million in six portfolio companies; and three, no change associated with four portfolio companies that had neither an increase nor decrease in unrealized appreciation/depreciation during the quarter.
Finally, BDCA Venture’s NAV decreased by $0.14 per share as a result of, one, the second quarter 2014 dividend of $0.10 per share, and two, the dilutive effect of stock dividend distributions paid in the second quarter which was $0.04 per share.
And again to recap – that was a total change after I rolled [ph] that together of negative $0.02 per share for the quarter.
Next, I will address the current stock price discount to NAV issue. First, a little background. On May 9, 2012, our Board of Directors authorized a stock repurchase program of up to $5 million for a period of six months which was subsequently extended until May 8, 2013.
On April 25, 2013, the Board of Directors further extended the stock repurchase program till November 8, 2013. On October 24, 2013 the Board of Directors discontinued the stock repurchase program in order to make additional capital available for potential new investment opportunities.
During the 2012-2013 stock repurchase program, BDCA Venture repurchased a total of 448,441 shares of common stock all of which were accretive to NAV and which represented about 5% of our then issued and outstanding shares.
Based on our current discount to NAV, our Board of Directors has been and will continue to be committed to instituting programs and policies designed to narrow or ideally eliminate any discount to NAV. In light of the stock price discount to our NAV of 19% as of June 30, 2014, our board has authorized management to assess various programs and policies and recommend a plan to address this discount. Such plan may include repurchase of our common stock up to $5 million. We will continue to provide our stockholders with periodic updates as warranted.
With that, I will turn it back to Margie. Margie?
We will now open the call to Q&A. As a reminder, we are accepting verbal questions and we ask that you follow the operator’s instructions if you would like to ask a question. Operator?
(Operator Instructions) The first question comes from the line of Ed Woo from Ascendiant Capital.
Edward Woo – Ascendiant Capital Markets
Yeah, Tim, thanks for taking my question. I had just a general market question in terms of what you’re seeing out there, in terms of bolt-on private company valuation, any big changes recently and also what are you seeing out there with the IPO market and what’s your outlook for the rest of the year?
Ed, thanks for the questions. If I may, I am going to take the second question first. And then we will – just to give you an IPO market update and at the risk of sounding like a broken record, the IPO market continues to roll from strength to strength. Unlike 2013 where we had virtually 52-weeks of unbroken perfection, we did have a bit of an air pocket beginning in late March and really lasting about 8 to 10 weeks. And in particular, there was an impact on healthcare and biotech IPOs and what we saw was a sharp decrease in valuations and I think this point is worth noting -- although there were sharp decrease in valuations, the IPO market basically did not skip a beat. Let me be very clear on that. There is a mythology on Wall Street that we’ve undertaken a Herculean effort to dismiss that basically there is such a thing as an IPO window that opens and shut whimsically and capriciously, we believe there is no such thing whatsoever.
Case in point was this late March, late May timeframe where the IPO market did hit an air pocket but the air pocket was manifested in the form of lower valuation, not a decrease in activity. Case study number one is our own portfolio company TrueCar, which had a price range of -- indicated price range of $12 to $14 per share, they elected to price right in the middle of that choppy IPO market and ended up having to price at a 25% discount to the low end of the range. In other words, they priced at $9 per share and then they probably traded up as of the end of June to above the high point of the range. And if you look at any of the data points, we just continue to -- we will probably go over 250 IPOs this year. It'll be a better year than 2013, it will be the best year since 2000. This week as we speak, and I don't have the numbers actually in front of me, I apologize but we are expected to price north of 20 IPOs this week. A number of those IPOs are biotech companies raising less than $50 million in gross proceeds. So by any measure imaginable, the IPO market is firing on all eight cylinders right now. And again if you look at the line up of 20 or so companies looking to price this week, you will see in absolute preponderance of healthcare and biotech IPOs which of course is a very segment that suffered some indigestion in that two months beginning in the second quarter.
With respect to the first question on valuations and this is a phrase that I’ve introduced into our lexicon and calls but I will bring it up again. The concept of Unicorn and just to define that term, a Unicorn is a private company, it’s of course a piece of jargon but a private company with a valuation in excess of $1 billion. And it used to be that there was no such thing as a unicorn and now you can go to the Wall Street Journal's website or other places and I think there are probably 40 or more unicorns i.e. companies that trade at valuations north of $1 billion. And our general view of this is the following: we basically do not understand many of the valuations of these unicorn companies. We don't understand some of the $18 billion valuations for companies like Uber, a lot of these highly publicized private companies don't make sense to us. We still struggle to understand Facebook as an example which was reading today – I think is just getting close to breaking $200 billion in market cap which gives it at a higher market cap than most, nearly all of the companies in the Dow except I think 12 companies. So that – some of these valuations defy conventional metrics and valuations. We of course don’t invest in those companies. So I think if anything the market is becoming more extreme, more bifurcated from a valuation perspective where the unicorns, these companies that have the possibility of where to [ph] take off paradigm were supposedly so will continue to command these extremely high valuations and then the rest of the market kind of carries on in
Thankfully we tried picking this up $1 billion space, those are not subject to those valuations and if anything, there was a slight adjustment based on the softening of technology companies’ valuations in the second quarter. So I think it’s a tale of two markets. The unicorn market, one we do not pursue, gets more extreme and rest of the market ebbs and flows with the overall valuation of stock market but generally people are knocking down the door to go -- to do IPOs. The IPO market is hotter than a pistol and it's very very favorable conditions all-around.
Edward Woo – Ascendiant Capital Markets
Great, well thanks for the – definitely appreciate the color and the insight. I was wondering if I could ask one more question. Sure, obviously there is a lot of changes at least with the name and you guys got acquired. I was just curious what – has there anything really changed and should we expect that anything going forward with obviously kind of I guess, the new name of the firm and kind of the ownership of the advisor?
Well, since football season’s begun, I can’t resist – so instead of the Green Bay pack of colors of green and gold, we are now more like the Minnesota Vikings with purple and gold. But I am sorry – Margie Blackwell is cringing here but let’s just go through the facts. So what happened was the transaction was effectively an investment advisor acquiring another investment advisor. And what that means practically is the – what was Keating Capital has changed its name of course and its ticker symbol and we’ve described that, but there was no change to the capital structure and our mandate remains the same and I will get to that.
The investment advisor which was Keating Investments, which is now BDCA Venture LLC remains the same. So we have the same people, the same thing staff, same investment team, same offices, and really what we’re focusing on, Ed, is basically the same type of investments, perhaps with one small twist and that is – we’ve in our disclosure documents -- we've always talked about the fact that we’re focused on venture equity, growth equity and we realize that as a publicly trade BDC, we along with some of our peers that trade in the, if you will, the capital appreciation and total returns space, i.e. they’re not focused just on yield, suffer from a persistent discount to NAV. So in our 10-Q, and this has been the case for about the last three or four quarters, we’ve widened the investment mandate to be able to look, for example, at venture debt where other securities that generate some current income. At our board meeting last Thursday, our board asked us to take a closer look at this and we are doing that. But I think practically you should expect to see more of the same and then as time passes and our board studies this issue some more, we may make some small changes in our investment policy to include some investments that have an income of – excuse me, an element of current income or current yield. But right now it’s basically status quo and our main focus is on harvesting the portfolio and as you may be aware, Zoosk is a company that's publicly on file with the SEC to complete an IPO. We've made previous commentary about the percentage of your portfolio that we expect to go public over the next four to eight quarter. And really what we want to do is just work with our portfolio companies to make sure they take advantage of really what we can only describe are optimal equity market conditions, low volatility conditions, great IPO market and then basically get out there – one positive [ph] example of TrueCar – to get an IPO done and be prepared to take a discount to indicate the terms as necessary. But very long-winded way of saying more of the same focused on harvesting the portfolio but perhaps look for some more debt investments down the road.
Thank you. Your next question comes from the line of Sam Rovasky [ph] from FBR Asset Management.
Now as far as the companies that are going public that are part of the portfolios, and Zoosk, is there anybody else that has filed besides Zoosk?
None. None have filed – none have announced and filed publicly. So we are aware of confidential information that various of our portfolio companies provide with. So for example, if one or more portfolio companies had filed confidentially we would be aware of it but because of the confidentiality agreements that we signed with our portfolio companies, we can’t share that. So what we are able to disclose today is Zoosk is the only company in our portfolio that is publicly on file to complete an IPO.
Another is – can you say that the number of companies that may have filed
Well – and I don't want to -- I don't want to be evasive for any reasons but we’ve made a conscious decision not to quantify that. And the reason why we do that is to try to minimize speculation about which companies and also should there will be a change in the company – filed confidentially and then elect not to move forward, we don’t want to be in the awkward position of having to backtrack. So we’ve just taken the simple view that we only announce what’s been publicly filed and that’s also the really the totality of our commentary in terms of numbers and profile.
Okay. Now you say as far as the next year, how many of the companies do you expect to have, not the calendar year, but from now going forward into the next year, how many companies do you expect to either have a public offering or be acquired?
So let me try and answer that one as specifically as I can. In the last few quarters, we had made – we had made announcements on our public disclosure, our 10-Qs, and 10-Ks that we expected a majority of our private portfolio companies to go public in the next four to eight quarter. And so that was really taking us through the end of 2014, 2015 and may be dribbling into the first to second quarter of 2016. We basically have no change in our outlook from that previous disclosure. And so I think you should -- just to put a number on it -- assume that something seven or eight portfolio companies will go public or be sold over the next four to eight quarters and that was the implied math from our previous disclosure and there's really been no change in that outlook.
Now then with your cash, I think it's the 9.8 million that you have which is down from 13.5 million, how much do you need to keep available to have – in case you need to invest, what is the minimum you need and what is – is it 5 million?
$10 million has generally been the amount of cash that we want to keep in the portfolio at all time. And the purpose of that cash is three fold. One, to make sure we have plenty of dry powder for follow on investments in existing portfolio companies, should those opportunities rise. Second, to cover operating expenses, and third, to have cash for new investments. So I think -- and that $10 million has been the guiding principle. At our most recent board meeting that was a subject that came up. We took a careful look at that and so we will be keeping an eye as to what the correct number is going forward. But I think operate with the assumption that $10 million which is what we’ve previously disclosed and what we have been operating on will be the guiding cash management policy going forward. And then just as a footnote, of course as we make dispositions, the policies to distribute a 100% of our capital gains and then we have the balance available for reinvestment and as a further footnote, under the distribution policy that we adopted in February of this year, a maximum of 25% of each distribution is paid in cash.
So I think when we look at it in the forecast internally, we should have plenty of cash to cover everything we need and to make cash available for new investments, assuming that our portfolio companies go public or sold and we dispose of them on the timeline that we have indicated.
So how much of this 9.8 million, will you feel comfortable investing in the next year?
I think right now based on our current check size for new investments is $3 million and my guess is over the next 12 months -- again depending on disposition you could see anywhere from one to three new investments of approximately $3 million each.
Okay, so unless there is a real exciting investment you sort of – or unless there's any kind of event that happens that monetizes some of the other investments, you won't be aggressive, is that a fair way of looking at that?
Now with the situation – yeah
Just what I will do is I will let you – why don’t you have one more question and then – if you have other ones [indiscernible]
Just the one final is the BDA means the new investment advisor, do they have other close end funds and do they presently expect to do anything about merging this fund with any of their other funds?
So there are two entities that are relevant and let me try and say their names slowly because it can get confusing very quickly because they sound the same. There is a publicly reporting but none traded close end fund which has elected to be treated as a BDC and that -- the name of that fund is Business Development Corporation of America which we refer to as BDCA. And that is a business development corporation that’s focused on making senior loans to companies. I don't have the numbers at my fingertips but they have raised about $1 billion plus or minus as of the March 31 filing. I don't have it exactly. And just to be further confusing, there is a -- the investment advisor to BDCA, it’s called BDCA Advisor LLC. So the funded BDCA, the advisor is BDCA Advisor. And that is part of a larger family of fund and I won’t go through the whole organization chart because I could get hopelessly complex but the ultimate parent company is a New York firm called the American Realty Capital which is the sponsor of a number of real estate investment trusts.
Is that ACAS?
No, that’s American Cap Strategy. So -- most didn’t have American Realty Capital, so usually it’s American Realty is the beginning name. So ARCP, ARCT, so they have a variety of publicly traded vehicles and I think what I can say very safely is the overarching principle for all of the fund sponsored activities is to create liquidity events for stockholders and those liquidity events have included traditional IPOs, they have included listings and a listing would be where no new capital is raised but where the fund just begins trading on a senior exchange. They have included sales to other funds. And so all of those liquidity options are available and so BDCA is in a very different line of business from the BDCA venture Inc. formerly Keating Capital. So those two funds will not be co-mingled in anyway because they are in very different lines of business.
So what is being discussed internally is what are the strategic options to grow BDCA venture Inc., ticker symbol BDCV and there are a number of possibilities that the board is considering based on the resources of now the significantly larger platform that we’re now a part of. As you might appreciate we had a stockholder meeting in mid June, the transaction closed on July 1 and this was our first in person board meeting on July 24. So we have a new board that has done their homework, is understanding where we are and considering options where we’re going. So we expect to be highly communicative in the next quarter or two with respect to all aspects of our existing portfolio, new investments, new strategic initiatives. So I think we will have a lot to communicate between now and the end of the year.
The next question comes from the line of Tim Coach [ph] with DFG Investments.
With a three follow-on investments in the portfolio companies this quarter and they're all three in terms of evaluation underwater on average of about $2 million. At what point is this throwing good money after that?
Fair question. So let me walk through the fact and circumstances and each of them is slightly different. And I'll try to do my best to communicate in plain English but in one of the investment Stoke, we own common stock and they were doing a round of preferred financing. So we had the opportunity which was somewhat unusual to exchange our common stock for preferred stock and the obvious question is what does that mean and why is that important? And it was extremely significant because Stoke is a company that has basically little debt. And so what happens is that with common stock grows at the bottom of capital structure, but by exchanging our common for the preferred stock we moved to the very top of the capital structure and the instrument that we invested in has some extremely fracted liquidation preferences. So in the case of Stoke, it was an opportunity to really dramatically change the nature of the securities the we own now. What we can't enumerate is for example – I mean let’s just give you an illustration of Stoke is sold based on the liquidation preferences that we have now with the preferred stock, we would have a dramatically different return profile compared to our common stock position and suffice it to say that some of these companies depending on what their exists have the ability to swing from being a markdown to a net profit or write-up, in certain cases it’s a significant write-up.
Stoke – 9.40 valuation end of the year, of 2.6, is that all based on the change in common stock there?
It’s a combination of two elements. One was the new investment which was $1 million and the balance is the difference in the securities that we own. But so that's what happened with Stoke.
In the case of Agilyx, just to provide you a little bit of detail, Agilyx had a fairly significant recapitalization and without – and I tried to describe our business in the plainest language possible occasionally, I feel compelled to draw upon a piece of jargon, in this case actually Agilyx did something called a pay through play-round and in the parlance of the venture capital industry means that if you don't play, i.e. participate in the next financing round you will pay, meaning that you will have inferior economics. For a variety of circumstances we were able to make a very modest investment in Agilyx which was $199,000 and in our view dramatically changed the value of the position of the securities that we own, and in that recapitalization a number of participants didn’t play. So they paid. So our relative standing in that capital structure is dramatically enhanced.
And in the third financing I guess we did a little bit in Suniva. Suniva, Tim, in your back in Norcross Georgia there, Suniva has really had nothing short of a complete change in outlook and really they are in the solar cell and module business and the issue had been – and that industry had been in a state of precipitous decline. Why? Namely there was a glut of cells and modules on them basically being dumped on the market by Chinese manufacturers and the price per cell or module had plummeted and to make a long story short, there have been some significant tariffs erected or plan to be erected in the US, there was actually a fairly comprehensive article in the weekend edition of the Wall Street Journal that specifically identified Suniva along with Solar City as one of two potential beneficiaries. And here's the bottom line. There are only about 3 manufacture -- American manufacturing facilities and many of the people like Solar City who are going gangbusters have to buy modules from under [indiscernible] from modules in the US and -- with some of these tariffs that are prospective, it has become prohibitively expensive to buy modules from China. So Suniva has gone from a position of relative weakness i.e. an American manufacturer being savaged by vicious Chinese pricing to a position of tremendous strength which is one of two or three American manufacturers that is now the beneficiary of tariffs that are in the process of being erected and possibly pot escalated.
Suniva actually their outlook has changed so dramatically that they announced the opening of a new facility in Michigan and so on in this particular case although we had had Suniva markdown historically, it was really a result primarily of the severe challenges in the industry which have had a dramatic reversal of fortunes. So you will see some volatility in these positions for a whole variety of reasons, not the least of which is their emerging growth companies subject to all the usual risks but certain cases, we’ve had a change in the securities we’ve owned. There have been change in the industry dynamics, in certain cases, there will be changes to specifics to the portfolio companies. But that's really the motivation for some of the follow-on investments and I think you'll see over time, and Tim, I will ask you personally to remember this call that, I think these follow-on investments will serve us and our stockholders very well. And that will be borne out in the next two to four quarters. So keep an eye on these positions and we will watch together as they change. So I think we felt extremely positive about the follow-ons that we made notwithstanding the fact that all of them were in positions that had been marked down.
On another point, at $0.16 a share going to overhead each quarter, with the new management company, will that go up or down or changed, or do you have any idea?
The overhead costs are an extremely important issue. We’re very cognizant of that and I think the board is extremely sensitive – why I say the board – the board has already been sensitive both to absolute operating expenses as well as our operating expense ratio. And we know that our operating expense ratio is a function of operating subscale with a very small number of assets we have. I think the spirit of the board and the parent is to do everything possible in the short-term to not have expenses get worse and to look for opportunities to drive the operating expense ratio down significantly over time and the mechanism for driving that down over time is through a larger asset base. So highly cognizant of the operating expense ratio will basically hold the line in the short-term and look for every opportunity to drive that operating expense ratio down through strategic growth in the longer-term.
I got one idea to do that, I wonder if you all could look at suspending incentive fees which are just accrued, not paid, until the cash is there to actually pay them and the board could vote to bring it back, I mean that’s 39% of your overhead.
I would say this and I will – I will respond to this and then see if we have any other questions. The ultimate parent corporation here, American Realty Capital has done a commendable job generating return for stockholders in all the funds they’ve sponsored and I think they have done that by taking stockholder friendly initiatives at every turn imaginable and so we have discussed various possibilities and I would say that our inbox is wide open and all comments are greatly appreciated, and the commitment that I can make is that all comments will be very well received. The track record for being very friendly to stockholders belongs to American Realty Capital, the ultimate parent and I think through the many funds that they sponsored and the great way that they have treated stockholders in a variety of vehicles under different market conditions and different exit scenarios, there is an admirable track record of doing what's right for stockholders. And our board, one of the members of our board Leslie Michelson has served on other boards of American Realty Capital sponsored entities. And so there's a tremendous awareness of considering anything and everything that is positive and friendly to our stockholders .So all suggestion is greatly appreciated and quite frankly although I can't call out names and people here, we have acted on comments that is specifically come from other stockholders in the past and our board is very amenable and very responsive to all constructive suggestions to build value over time. So I am going to officially put that one in the inbox.
It appears at this time that there are no further questions on the phone line.
Thank you. That concludes our call for today. And we want to thank everyone for joining us. Our next conference call has been scheduled for October 27, 2014 following the filing of our Q3 2014 result. We look forward to your continued interest in BDCA Venture.