At $9.00, GSV Capital (GSVC) is trading at a 36% discount to its Net Asset Value (value of the Company's cash on hand plus investments at cost, or "NAV") representing a deep value opportunity. The Company operates as a closed-end investment fund focused on late stage venture capital and growth equity opportunities. The Company targets investments in the "hottest" emerging sectors, specifically in the social media, clean technology, cloud computing, and internet spaces. Some of the Company's holdings include Twitter, Dropbox, Gilt Groupe, Rho, Bloom Energy, Silver Spring Networks, and Chegg.com.
Publicly traded closed-end funds are straightforward to value as they are required to disclose their holdings and the respective cost basis of each of their investments every quarter. As of the latest quarter (March 31, 2012), the Company's NAV was $13.47 per share. Subsequent to Q1, the Company raised additional capital at $16.25 per share; this was accretive to Q1's NAV.
According to the Company's June 5, 2012, disclosure, it holds $120 million in cash and over $150 million of investments at cost. This equates to an NAV of ~$270 million, or ~$14.12 per share. Its current share price of $9.00 represents a 36% discount to NAV.
So why is the Company trading at such a steep discount to NAV? Over the past 52 weeks, the Company's share price has ranged from $8.83 to $20.89. The Company reached its 52-week high, a 61% premium to NAV, at the height of the Facebook (FB) IPO frenzy. During the two weeks following its IPO, Facebook shares dropped 32% and panic among GSVC investors ensued. GSVC shares declined by over 35%, despite the fact that only 4% of the Company's holdings were in Facebook shares. Since this initial plunge, Facebook shares have rallied nearly 28% while GSVC shares dropped an additional 15%. The early investors in GSVC were burned by the market's reaction to the Facebook IPO and subsequently sold off their holdings in GSVC, creating a deep value opportunity.
GSVC's management has been diligent in purchasing shares at conservative prices with room for returns. A few examples:
- GSVC's most publicized purchase was in Facebook before its IPO, when it purchased shares at $29.92 per share. Management noted that it had the opportunity to purchase additional shares at prices above $30 per share, but decided not to. Keep in mind, at the time, the hype around Facebook was at its peak and many people believed Facebook was a $100+ billion company, with shares trading as high as $44.00 in the secondary markets. Ultimately, Facebook has not performed as many expected, but it still trades at a premium to where GSVC purchased it.
- GSVC's largest holding, Twitter, has a cost basis of $16.52 per share. Twitter's shares have recently been quoted as high as $21.00 and most recently at $18.00 per share, representing a ~9% unrealized return. Furthermore, some believe Twitter could ultimately be worth as much as or more than Facebook, which would imply a 5x return.
- In June 2011, GSVC purchased shares in Bloom Energy at a $1.8 billion valuation. In June 2012, Bloom Energy raised additional equity at a $2.6 billion valuation, representing a ~44% unrealized return. Subsequent to the equity raise, Bloom Energy recently announced a partnership with EBay to build America's largest fuel cell data center.
There are numerous potential catalysts that could move the stock to return to a price closer to its NAV, including the following:
- Acquisition of a portfolio company: An acquisition or proposal to acquire one of the Company's holdings would provide a strong catalyst to GSVC shares. For example, if Google were to make an offer for Twitter or Microsoft for Dropbox, the stock would skyrocket. The recent social media acquisition blitz provides evidence that companies with ample cash are looking to make acquisitions (Microsoft (MSFT) acquiring Yammer for $1.2 billion; Oracle (ORCL) acquiring Vitrue for $300 million; Salesforce (CRM) acquiring Buddy Media for $745 million).
- IPO of a portfolio company: GSVC focuses on late stage venture capital investments, as evidenced by the fact that 70% of its invested capital is in Series C shares or later. The Company's holdings closest to IPO are Twitter, Dropbox, Silver Spring Networks, Gilt Groupe, Violin Memory, Chegg.com, and Bloom Energy. An announcement of IPO plans from any of these companies would generate investor excitement and increase demand for GSVC shares.
- Positive news from a portfolio company: Any material positive news from one of the Company's top holdings could provide a boost to GSVC shares.
As GSVC's portfolio companies get closer to IPOs, their values should increase. Alternatively, an acquirer of any of these companies would likely be required to pay an acquisition premium.
- Q2 earnings release: The Company's latest reported NAV was $13.47 per share as of March 31, 2012. The fact that the Company's follow-on offering in May 2012 was accretive to NAV, and that the NAV is currently above $14.00 may not be apparent to some investors, as many focused solely on Facebook's initial share price decline. The increase in NAV that will be revealed in the Company's Q2 financials could provide a boost to shares.
- Hypothetical liquidation scenario: The Company's market cap is currently ~$175 million versus its NAV of ~$270 million ($120 million in cash and ~$150 million in investments). If the Company decided today to unload all of its holdings onto the secondary market and distribute to investors those proceeds in addition to its cash on hand, investors would make out with a ~55% return. GSVC's management team believes that their holdings will grow in value. They are investing in high growth, well-known, leading private companies; generally, valuations of these types of companies tend to rise over time.
- Venture capital investing discount: Here's another way of looking at GSVC. If you were an institutional investor or pension fund and you wanted to invest in a venture capital fund, you would be required to pay a dollar for each dollar in the fund. At the current share price, GSVC offers the opportunity to invest $0.65 for each dollar in its fund, or a 35% discount. Further, in a typical venture capital fund, you invest at the beginning of the fund's life, when the fund's investments have not yet been determined and the total investment and hold period is greater than five years. GSVC has already invested more than 50% of its capital (meaning shorter time to IPO/monetization) and in the hottest private companies available (Twitter, Dropbox, Gilt Groupe, Chegg.com, Rho, Violin Memory, Avenues, Control4, Silver Spring Networks, Palantir Technologies).
In summary, at the current share price of $9.00, GSVC offers the opportunity to invest in a venture capital fund that holds top notch private companies at a 36% discount, with numerous potential catalysts to realize full value. Furthermore, the current deep discount to NAV provides a strong margin of safety.
Disclosure: I am long GSVC.