I want to offer insight on some of my previous comments that received backlash from certain individuals who felt my bearish sentiment on a particular security were out of line. I will keep it brief, but let me provide some concrete information to back up my belief that the closed-end fund called Firsthand Technology Value Fund (SVVC) is not the way to play the Facebook (FB) IPO, if those are your intentions. I am not saying readers should short the stock or that it will not increase in value from its current price of $26. All I am looking to do is inform readers as to how the numbers work out, and how much exposure they actually have to Facebook when they buy shares of Firsthand.
First, let's assess how many shares Firsthand actually owns of Facebook: 600,000. Facebook has since closed the secondary auctions of its shares as it prepares to launch its IPO, so the window to obtain any more than this number has closed. Firsthand purchased these shares through secondary auctions over the course of a few months earlier this year. The news did not go unnoticed, and Firsthand saw its stock go from $14 to $45 in a matter of 90 days. It seemed as if management had won the lottery with their brilliant strategic purchase of Facebook shares in early-2012. This was not like other funds and companies (Microsoft, T. Rowe Price, etc.) that made a strategic investment in Facebook before they took the world by storm. Firsthand was a late-mover, although a mover, in getting itself a piece of the Facebook pie.
However, management would not let this run in price go without, in my opinion, taking advantage of shareholders and diluting holdings of its only real "trophy" asset, Facebook -- the one reason why everyone rushed in to buy Firsthand to begin with. The follow-on offering was for a total of 4,400,000 shares with the option for underwriters to purchase an additional 660,000 shares within 30 days after the offering. This was a major dilution in regard to their holdings of Facebook.
Before the offering, Firsthand had a total float of 3,496,000 shares. This number is taken from the fund statistics page on its website, which they claim was a total of $86 million in assets and 3,496,000 shares, equaling a NAV per share of $24.56.
So, with a follow on of 4.4 million shares the new total (not including the underwriters' option of 660,000) comes to 7,896,480. If you assume that the underwriters want a piece of the action and exercise their shares, you get 8,556,480. The table below shows the impact of the follow-on offering in terms of NAV (positive) and Facebook holdings (extremely negative).
|Pre-Follow On||Post-Follow On|
|NAV / Share||24.56||25.94|
|Shares of Facebook||600,000||600,000|
|FB / Share||0.172||0.076|
|Dilution of FB||100%||44%|
Now, for every one share of Firsthand you buy, you receive 0.07 of one Facebook share. Even if Facebook doubles on the day of its IPO, giving it a market cap of $200 billion, you will have $7 of value added to your one share of Firsthand. This is much worse than the pre-follow-on scenario, which would have given you $17 of value for every share you owned. The impact of the follow-on was positive in terms of NAV, but that is not what was driving demand for this stock. The reason anyone is talking about this fund is its holdings in Facebook. The rest of its portfolio? I will let readers judge for themselves.
In conclusion, if you want to play Facebook you are much better off buying a publicly traded company that has comparable assets/business model.The most obvious choices are (in no specific order): LinkedIn (LNKD), Zynga (ZNGA), Pandora (P), Zillow (Z), Google (GOOG), Tencent (TCEHY), ebay (EBAY), and Salesforce.com (CRM). If institutional investors want a piece of Facebook, they either already own it, or they will have access to the shares when they go public. Don't believe me? Check for yourself who the major holders are. You won't find a single large institution on the list with more than a few peanuts in shares.
Prospective investors also need to keep in mind the high fees that come with owning a fund like Firsthand. It operates much like a hedge fund taking a large percentage (20%-30%) of capital gains on top of a general management fee (1%-5%) of all assets under management. The hype surrounding this stock is only for the retail, mom-and-pop investors who hear the word "Facebook" and jump on board without doing their homework first. Smart money knows how to do math. They know that buying this fund they get mostly cash (from the follow-on), a slew of holdings that are, in my opinion, undesirable (solar, Yelp, etc.), and a very small sliver of Facebook.
With all of this in mind, I ask that readers do all possible due diligence before they consider buying a fund like Firsthand to try and capitalize on the Facebook hype. As the old adage goes, if it sounds too good to be true, it most likely is. I believe this case study is a relevant example of that saying.