SuRo Capital Corp.
Q1 2020 Earnings Call Transcript

Published: 8 May 2020

[Operator:]

Good day, ladies and gentleman and thank you, for standing by. Welcome to the Sutter Rock Capital First Quarter 2020 Earnings Call. During today’s presentation all parties will be in a listen only mode . This call is being recorded today. And I will now turn the conference over to Claire Councill. Please go ahead.

[Claire Councill:]

Thank you for joining us on today’s call. I’m joined today by the Chief Executive Officer of Sutter Rock Capital, Mark Klein and Chief Financial Officer, Allison Green. Please note that a slide presentation that corresponds to today’s prepared remarks by management is available on our Web site at www.sutterrock.com under Investor Relations Events & Presentations.

[Mark Klein:]

Thank you, Claire. We are pleased to announce the results of Sutter Rock Capital’s first quarter 2020. These are obviously unprecedented times we’re living through and society is facing tremendous challenges. We at Sutter Rock Capital like to thank the frontline workers and first responders who have put themselves at risk throughout the COVID-19 pandemic to help others. We are fortunate to report that our employees and their families are healthy, and our companies continue to function remotely like many other firms. Our portfolio has held up relatively well compared to the broader market indices, which experienced one of their worst quarters since the financial crisis. Our portfolio company valuations were priced as of March 31, 2020, which was one week within the bottom of the market sell-off. And as you all know, since that time most of the major indices have recovered to pre-COVID levels. I will discuss how our portfolios fared during the onset of the COVID-19 pandemic, and highlight how a few of our larger positions have experienced degrees of business acceleration during this time. To conclude, I will hand the call over to Allison Green for a brief overview. At the conclusion of our remarks, we will open the call for questions.

[Allison Green:]

Thank you, Mark. I would like to follow Mark’s update with a more detailed review of our financial results as of March 31, 2020, our share repurchase program, our transition to an internally managed BDC and other ongoing expense reduction initiatives and our current liquidity positions. Before I review the financial results for the quarter, I do want to echo our March 19, 2020 press release and confirm that today and for the foreseeable future, Sutter Rock has been working remotely and adhering to state ordered social distancing and stay at home mandates. We have not experienced and do not anticipate any operational disruptions during this time. We ended the first quarter with an NAV per share of $10.22. A breakdown of NAV per share as of quarter end is shown on Slide 8, and i consistent with our financial reporting. In sum, the decrease in NAV per share during the first quarter was largely driven by approximately $1.59 per share of net unrealized depreciation of our portfolio investments and a decrease of $0.17 per share of net investment loss. These decreases to NAV per share were offset by $0.40 per share in net realized gain on investment and a net $0.20 per share increase due to the accretive effects of common stock repurchase during the quarter through the share repurchase program. During the first quarter, we paid the second of two dividends declared in late 2019. On December 20, 2019, our Board of Directors declared a dividend of $0.12 per share that was subsequently paid on January 15, 2020 to shareholders of record as December 31, 2019. The first 2019 dividend of $0.20 per share was declared on November 5, 2019 by our Board of Directors and paid on December 12, 2019 to shareholders of record as of December 2, 2019. The dividends declared and paid have been categorized as net realized capital gains for tax purposes. These realized gains are generally attributable to the monetization of shares held in our portfolio companies that went public and other successful exits in 2019. Please refer to Slide 9 as I review the current state of our share repurchase program.

[Operator:]

Thank you For our first question, we'll go to Alex Paris.

[Alex Paris:]

Hi, Mark and Allison, I hope you and your families are well. Congratulations on the quarter. You had a decline in NAV, but the decline was less than I think most people feared. My question is related to your portfolio of companies. In your prepared comments, you mentioned the talent here is the subject of IPO talk, although, that's going to require obviously a more stable market environment. I'm wondering what other companies in your portfolio are likely to pursue an IPO track, and maybe comment on your new investment pipeline? In the press release, you talked a bit about some potential exciting investments that you hope to close by the end of second quarter. Thank you.

[Mark Klein:]

Alex, thanks. And I hope you and your family and the firm are doing well. It's obviously difficult times for all of us and thank you. And again thank, you for you and your firm's ongoing support to the organization. So in no particular order, in respect to Palantir, you got everybody's reading, the same thing that we're reading. There was a lot of information in April around where the company is, what the revenue line is. The fact that they even put that out and the implications of them going public and whether they go public this year or they go public next year, it does appear that they're preparing to do so. So that is one. We did actually highlight and I know this is something that you focus on. Clearly, our online education companies are doing extraordinarily well. If you look at some of the ones that are public, like the Chegg, you can see how the markets reacted to their extremely strong performances, pandemic has impacted our student learning. When we look at our portfolio, sort of what could go public, it's a size and scale. So from a size and scale perspective, and this is not speaking out of school about any of them. But on a size and scale perspective, a company like Coursera, is a company that is -- would be one that would pop up and come to mind more directly. I think our two cannabis companies have stated, cannabis REITs have stated publicly and on their initial capital raise that they intended to go public at some point in 2020. I think the world has gotten a bit complex for them. But I think the goals for those companies are to be listed as really the only one that's listed is IIPR. So on the public, you know, the go public perspective, I think those two. So we did mention that there's a fair amount of M&A activity that is in and around our portfolio. I do anticipate that those will come to fruition shortly for not, but they're at that stage where there's an anticipation that those transactions will close. Those do represent gains from across spaces and markups from where we are right now. So that's pretty exciting, especially given the backdrop of the fact that everybody's virtually working remotely and those are current. So I think that's great. I would say, again, since we haven't closed our pipeline, it is and this should come as no surprise to anybody. There is a lot for sale right now, both on the secondary side and on the primary side, in names that we have been monitoring for the better part of 12 months or longer, names that we've done a great deal of work on, names that we have thought about investing in earlier but passed because of valuation. I do anticipate that we will have a name that we will be able to close on extremely shortly. In fact, we're simply in the ROFR period in one of the secondary transactions. We do have a couple of primary debt transactions that we're looking at and those are in advanced stages as well. So this is -- we are fortunate in the sense if you could be fortunate in an environment such as this that we've had, we have a fair amount of capital to deploy and that we're getting an awful lot of opportunity from both the secondary side and the primary side. And I’ll close with, although the Lime and it was -- the Lime transaction, which got a lot of attention starting two days ago as it was leaked in top of Uber’s announcement. Although, significant reduction to the valuation that they achieved, six, eight, nine months ago. The construct of this transaction and the ability for us to participate on a pro rata basis, truly gives us an opportunity to do quite well in Lime investment if the valuation moves from this level, but nowhere near the levels in which we made our initial investment. So again, we couldn't be busier from a corporate perspective and the opportunity set, as you can imagine, is extremely broad. And we are looking at everything and making decisions judiciously as although we do have a fair amount of capital to deploy, it is limited and we want to utilize it to go against the best opportunities that are presented to us. So thank you, Alex.

[Operator:]

And we will take our next question from .

[Unidentified Analyst:]

It'd be nice to hear how the pandemic has changed the environment and your outlook for private credit investments. Are you still targeting around 20% of assets under private credit, and maybe what new opportunities could arise as a result of the pandemic?

[Mark Klein:]

And while those who are focused on the credit market as opposed to the equity market understand the credit market is far more in disarray than the equity markets, which is sort of hard to fathom given the equity market plummet through March and then rebound since the third or fourth week in March. So the broadly defined private credit market, I think is an interesting situation. There's been billions and billions of dollars that are out there to be raised to deploy against that. And it's really in a part of the credit market that we really hadn't anticipated participating in. I still don't think we will. Again, our view on the private credit side is to look at venture backed companies that need financing on more of an asset base side that, for lack of a better word, would be off balance sheet. So not your traditional BDC private credit side, but it's a bit of a niche, it is a niche that Keri had identified prior to joining the organization. And it is one that we are executing against, which we have an opportunity to lend against in asset of a company, and then get some sort of equity participation of the venture backed company. So we’re seeing, as you can imagine, we're seeing an awful lot of that right now. We are progressing. We’re actually are progressing fairly deeply against a couple of them right now. And as we suggested in our prepared remarks, we anticipate announcing something certainly as we get into the end of Q2. So thank you. I appreciate the call and the support of your firm.

[Operator:]

There are no further questions in the queue at this time. Ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.

[Mark Klein:]

Again, thank you everybody. Thank you all for attending our call. I hope this call finds you and your families healthy, and that we all continue to remain safe. Thank you all very much.