SuRo Capital Corp.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GSV Capital Third Quarter 2014 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This call is being recorded today, Thursday, November 6, 2014. I would now turn the conference over to Spencer McLeod of GSV Capital. Please go ahead.

[Spencer McLeod:]

Thank you for joining us on today’s call. I’m joined today by GSV Chairman, CEO and Chief Investment Officer Michael Moe; and Chief Financial Officer Bill Tanona. Please note that a slide presentation that corresponds to today’s prepared remarks by management is available on our website at www.gsvcap.com under Investors, Events & Presentations. We are also live tweeting segments of this earnings call via the Twitter handle @gsvcap. Today’s call is being recorded and broadcast live on our website rwww.gsvcap.com. Replay information is included in our press release that was issued earlier today. This call is property of GSV Capital Corp and the unauthorized reproduction of this call in any form is strictly prohibited. I’d also like to call your attention to the customary disclosures in our press release today regarding forward-looking information. Statements made in today’s conference call and webcast may constitute forward-looking statements, which relate to future events or future performance or financial condition. These statements are not guarantees of our future performance, or future financial condition or results, and involve a number of risks, estimates and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including but not limited to those described from time to time in the company’s filings with the SEC. Management does not undertake to update such forward-looking statements unless required to do so by law. To obtain copies of GSV Capital’s latest SEC filings, please visit our website at gsvcap.com. Now with that, I would like to turn the call over to GSV’s CEO, Michael Moe.

[Michael Moe:]

Thank you, Spencer, and good afternoon. We’re delighted to have the opportunity to share with you what we believe was a very good third quarter with a number of important milestones. First, I’ll review our portfolio as of September 30, 2014 then we’ll highlight some recent developments and update you on some new investments. I’ll then turn over to our Chief Financial Officer, Bill Tanona who will briefly provide the financial overview then open up for questions. So let’s start with slide three. As of September 30, 2014 our Nest’s assets were 293.1 million or $15.17 per share. This is the new record high for NAV and represents an increase of $0.31 for the second quarter of $14.86. Moreover it’s over a 15% increase from a year ago or $2.01. Additionally we realized $17.2 million of net gains for the quarter. We have said for some time that we would opportunistically sell private positions to get liquidity, realized profits and optimized portfolio of management strategies. Accordingly we think that it’s a significant milestone that we are able to sell our entire private position in ZocDoc and Dianrong formerly known as SinoLending as well as the small part of our position in Palantir all at strong gains. The main of our Palantir position is 7.15 million of shares and no way reflects a diminishing view of our Palantir’s, our view of Palantir’s prospects quite the contrary. But we think it was prudent to take some profits while still retain a large position. Obviously it’s very positive that we can show there are other ways to monetize our positions and addition to put forth company going public or being sold. So we are very pleased, we’re able to successfully demonstrate this and three instances during the quarter and shareholder should look continue to expect to see more of this in the future. Now let’s turn to slide four. As mentioned, we liquidate our entire position in Dianrong which is formerly known as SinoLending and realize a 3.5 million gain an IRR of 151%. In addition, we sold our entire ZocDoc position realizes $2.5 million gain which is an IRR of 18%. As mentioned we sold their 20,000 shares of Palantir realizing the gain of $890,000, this was an IRR of 36%. As previously mentioned, we continue to hold 7.1 million shares of Palantir with the fair market value of approximately $39.5 million. Lastly, as we stated in our general attention, we stated in our previous quarter that’s our general attention to liquidate our public positions within 18 months of going public or 12 months after the IT lock-up expires. Accordingly we begun to implement our exit strategy around Twitter and we sold 300,000 shares at an average price per share of $52.29 realizing the gain of $10.6 million for our shareholders. This yield an IRR of 42%. We still believe Twitter has tremendous potential, evidenced by 114% revenue growth in the recent quarter and we continue to hold 1.6 million shares of Twitter stock. For the third quarter, our top 10 positions represented 65.3% of our total portfolio, our three largest investments Twitter, Palantir and Dropbox represented 40% of the total portfolio. Our fourth largest position 2U just reported an excellent quarter with revenues growing 39% and losses being meaningfully less than analysts had forecast. During the quarter we add to our six largest position Solexel participating in the $31 million Series D financing along with Kleiner Perkins technology partners and GAF which is the largest roofing manufacturer in North America. We believe Solexel has truly disruptive technology in a $100 billion solar industry. Overall, the fundamentals of our portfolio remained very strong with average revenue growth of 90% from 2013 to 2014. Please turn to slide six to look at equity and IPO market to-date. It’s been a bumpy ride for growth investment in 2014 while the industries are up approximately 10% year-to-date. The volatility within the high growth names has been very significant. Not surprisingly while we continue to have an active IPO market with 238 new issues price to-date and with two months left, 30% of all IPOs are price below the range and the average one day pop is 13% which is more or less we would expect of the normal environment, having an IPO market open is important to us to optimize our monetization options we have shown during the quarter. Other options are available for liquidity if this change is in the future. Next, please turn to slide seven, where we break our outer portfolio mix across growth themes as of September 30th. We are constantly analyzing the growth economy and how mega trends are influencing emerging teams. As we believe that’s where the mega winners will be found, of the five themes we have identified education technologies continues to be our largest commitment with 31.4% of the total portfolio cloud computing big data is 28.2% of the total portfolio, social mobile theme is 26%, marketplaces are 8.4% and sustainability is 5.4% of the total portfolio. Please turn to slide eight. There we’re going to talk about some of the investments that we have made recently. During the quarter we led a $15 million financing at CourseHero with a $5 million investment alongside IDG ventures, SVAngel and Maveron. CourseHero is a rapidly growing peer-to-peer marketplace for class notes and study materials. We’ve seen the peer-to-peer theme be explosive in other areas such as lodging and transportation. I think the potential here is enormous. CourseHero already has 5 million people in their marketplace generating meaningful revenue and significant growth. I’ve known the entrepreneur since he started the company in his [Dorr Cornel] five years ago and have been impressed by his execution against opportunity. Hence our excitement about being able to leave this round of investment. Now if you can turn to slide nine please. Subsequent to the end of the quarter, we made a $1 million investment and enjoy technology, enjoy CEO as Ron Johnson who formerly ran Apple Stores before coming to the CEO, jcpenney, other investors are Kleiner Perkins, Oak Investment Partners and Andreessen Horowitz. Enjoy is basically the Apple Genius Bar (inaudible). The continued growth of e-commerce and consumers love having the latest greatest technology is a major tailwind for Enjoy. Moving on to slide 10. Also subsequent to the end of the quarter we made a $5 million follow-on investment Ozy Media in conjunction with $30 million round led by German media giant Axel Springer. Ozy, the new media site that focus on what’s new and what’s next and led by Carlos Watson and has executive publisher Laurene Powell Job, who is also a significant investor in the company. As you may recall we have made two previous investments in Ozy which is consistent with our focus on feeding our winners, we definitely think that Ozy has significant potential to be a major winner for our shareholders. Ozy has over 5 million monthly unique users and has partnerships with MPR, CNN and USA Today. To put that user size and growth in context Buzz Feed and Huffington Post are both successful new media properties to just over a year to get a million monthly active user. Ozy has five times that audience with the same amount of time and just a tip if you don’t subscribe to Ozy’s Presidential daily brief, you should, people that also subscribe to Presidential daily brief from Ozy include Bill Clinton, Bill Gates, Condoleezze Rice and Tony Blair. Now thanks for your attention. With that, I’m going to turn it over to our CFO, Bill Tanona.

[Bill Tanona:]

Thank you Michael. Today I will be providing a brief financial overview. I will discuss our portfolio activity for the quarter. Give you an update on our current liquidity position and provide you an update on our current tax situation. Please now turn to slide 11 where I’ll briefly highlight the financials for the quarter. As Michael mentioned, our NAV at September 30th was $293 million or $15.17 per share which is an increase of $0.31 from our June 30th NAV of $14.86 or a 2% increase quarter-over-quarter. We had some meaningful portfolio activity in the quarter as Michael had highlighted including the liquidation of our entire position in two portfolio companies as well as two partial sales. We also made one new investment and six follow-on investments in the quarter. As a result of sales of portfolio investments, we generated net proceeds of $29.5 million in the quarter consisting of realized gains of $17.2 million or about $0.89 per share. $15.7 million of the proceeds were generated from the sale of 300,000 shares of Twitter at an average price of $52.27. $7.8 million was generated from our liquidation of our entire ZocDoc position, $4.3 million of proceeds were generated from our liquidation of our entire Dianrong position formerly known as SinoLending. And then $1.8 million of the proceeds were generated from a small partial sale of our Palantir position. As Michael mentioned, going forward, we will continue to evaluate price action in the private markets as one potential opportunity to get liquidity for our shareholders. We invested $10.3 million during the quarter including a new $5 million investment in CourseHero, a $3 million follow-on in Solexel, a $1 million follow-on investments in StormWind Studios to a warrant exercise and smaller follow-on investments in Circle Media, GSV sustainability partners, early shares in NestGSV. Subsequent to quarter end, we have made additional investments of $15.2 million including two new investments totaling $3.5 million in DogVacay and Enjoy and follow-on investments in Ozy Media, NestGSV, [Learnes] and GSV sustainability partners. Moving on, I’d like to spend a minute talking about our liquidity. Our liquid assets ended the quarter at a $114 million consisting of $6.5 million of cash, $18 million of undrawn credit facilities and $90 million of public securities not subject to lock-up arrangements. Subsequent to quarter end, we borrowed 7.5 – $7.0 million from our credit facility to finance the new investments that I mentioned earlier. Now I’d like to spend a few minutes to give you an update on our pending RIC status. In September of this year we filed our 2013 tax return as a regulated investment company or RIC. As many of you are aware, we are seeking to be granted RIC status for our 2013 taxable year. However we will not be eligible to elect to be treated as a RIC for 2013 taxable year unless we are certified by the SEC as having been principally engaged in the furnishing of capital to other corporations which are principally engaged in the development or exploitation of inventions, technological improvements, new processes or products not generally available for the 2013 tax year. In the event that we do not receive such certification or otherwise unable to meet all the qualifications to be treated as a RIC for 2013 we will be tax as a C Corporation for 2013 tax year. To that end, for purposes of our financial statements we have accrued taxes as though we are a C Corporation for the 2013 taxable year in the event that we are unable to qualify as a RIC. Should we not qualify as a RIC for 2013, we intend to be elected to be treated as a RIC for 2014 tax year if management determines that is in our best interest to do so. If we opt not to do so or unable to qualify we will continue to be tax as a C Corporation under the code for our 2014 taxable year. In other words we are hopeful that we will be granted RIC status by the SEC which would benefit our NAV by about $10 million but if we do not receive the exemption, the impact is already reflected in our current NAV. That concludes my comments and we’d like to now thank you for your interest. I will turn the call back over to the operator to start the Q&A session.

[Operator:]

Thank you. (Operator Instructions). And we’ll take our first question from Jeff Houston from Barrington Research.

[Jeff Houston:]

Hi thanks for taking my question. It was great to see the $17 million of net gains in the quarter. When you look at balancing portfolio management and freeing up liquidity versus longer term intentional returns. Is there an IRR target that you consider when looking to potentially exit portfolio companies any color there would be great.

[Michael Moe:]

Sure. With every investment we make we go through a very rigorous process to create forward scenario with return expectations. Every investment we make we underwrite with the expectations of a 30% or greater IRR. Obviously things changes and sometimes we can do better than that sometimes they don’t work out to that degree but that’s how we – how so we look at investment has to have a minimum 30% and how we look at that addition is the more, the less visibility or kind of the more risk we see the greater returns that we have to expect to make the investments. So that’s one piece of equation. As we look at monetizing positions, it’s a combination of hitting or realizing sort of what we think the return targets are coupled with just good prudent portfolio management. So if you look at Palantir, Palantir is doing tremendous we’re very excited about our position in the company, but as it grew in proportion to the overall portfolio we thought just made good portfolio management sense to trend some of that position we still have a significant over 10% of the portfolio as Palantir. But we took the opportunity to be basically realize some of those gains and the nice return for the shareholders.

[Jeff Houston:]

Great. Thanks Michael. And then as a follow-up to Bill regarding the RIC status what is the timeline for the SEC getting back to you on your application for RIC status for 2013.

[Bill Tanona:]

Yeah Jeff. So we’re in the process resubmitting that to the SEC again. Our hope would be obviously sooner rather than later. Hopefully by the time that we have our next call we will have some type of resolution as it relates to this issue. But then again as I say that obviously the ball is not in our court we’re obviously dependent upon the SEC at that stage.

[Operator:]

And we’ll take our next question from Blake Harper with Wunderlich Securities.

[Blake Harper:]

Yeah thanks for taking my question. I want to ask Mike about some of the sales that you made there has been debate about the valuation with a lot of private companies and just wanted to ask you how that the process went for you to sell those investments and if you had to have any market ability discount with them and just how the process and valuation works for you guys.

[Michael Moe:]

Yeah I mean. I think it’s been kind of well recognized that the private market is very active right now. And as it related to the selling of the positions that we have, we basically took advantage of very robust interest in the number of our names. Frankly, we see interest in other names and we could have certainly done more but we just felt like this was the rate amount to do now, but again we could take advantage of the increased interest in private markets our whole goal is to kind of optimize the portfolio. I will say I think while there is definitely new entrance of investors that want to invest in the private market basically supply demand issue or you get more, more demand versus a little bit of supply. I will say that I think a lot of that kind of frostiness is really kind of concentrated and maybe handful or two of names whether just that seems to be almost limitless amount of demand. And I think when you look broadly speaking while we think it’s a good market, it’s not quite to that extreme that we’ve seen in a couple of those, most of the highest profile names. From an investment opportunity standpoint, I think it also kind of shows that our focus is really where we think the power ally is and let’s say that’s kind of the $100 million market weight, $1 billion market value where the companies kind of lift off their emerging growth companies but haven’t reached the status or the visibility where you’re seeing kind of the large mutual fund players and some of these other funds looking to participate. And we think that’s a great place for us to be.

[Blake Harper:]

Okay great. And then just to follow up there on your comments Michael you said the parts are getting more competitive but you may be skewed to a fewer companies but how would you describe the process for your new and follow on investments that you made did you see them to be more competitive or have demand for other investors there or is that kind of the same or easier for you guys to get into them.

[Michael Moe:]

At one hand I think our reputation and stature in Silicon Valley is good and rising. I mean in other words in think we’re viewed as being good investors to have in the mix and reputations has been additive to the company and so forth is good. We’re just over three year old firm. But we’re trying to invest in the very best names and the very best companies, there is always going to be strong interest and so for example [Enjoy] which we mentioned which is the [inaudible] company which is effectively [inaudible]. And you had significant almost ridiculous amount of interest in that situation. And we certainly would have liked to have more, most of that interest and again a very premier type of investors most of that interest was turned away. But on one hand we don’t like to have more than $1 million that we’re able to put in and in other hand we got a $1 million and most guy shut up. So that’s sort of an example, we’re all the key for us is focus and having the reputation where the best companies want us to involve. And that’s where we work very hard at.

[Operator:]

And we’ll take our next question from Hannah Kim from JMP Securities.

[Hannah Kim:]

Hi this is Hanna I’m calling in for Chris Yorke. Thanks for taking my questions and congrats on having a good quarter. So after realizing a meaningful realized gain and I was wondering if you can comment on your thought about establishing a dividend. And particularly I am interested in your thoughts on a regular dividend run rate versus a one-time special dividend.

[Bill Tanona:]

Hey Hannah, this is Bill. I guess that the first thing that I would say is clearly given the uncertainty around our tax status. We would need to get greater clarity on that and we’re hoping to have that here in the coming quarters. I think the second thing that I would say is as you know we’re clearly getting to be in a position to the extent that we were a [REI} to be able to make a distribution to our shareholders and we want to and would love to make distributions to our shareholders. I think as far as whether it’s going to be consistent or I think in your terms a lumpy one time in nature, given the nature of our portfolio, I think it’s probably less likely that it will be a consistent dividend and more lumpy in nature, just given the nature of our portfolio.

[Hannah Kim:]

Great, thank you. And then my follow-up question is also related to dividend and also your investment strategy as well in the past quarter we are aware that one of the PDC that has a very similar investment strategy with yours. They also focus on investing pre-IPO companies; they switched their investment objective from providing equity investments to more of the income producing investments in order to provide a more consistent yield for investors. So I’m just curious what is your thought on increasing your portfolio exposure to more income producing investments?

[Bill Tanona:]

So what we believe, there is enormous opportunity and we believe we’re just trying to prove this out and making equity investments and providing returns to our shareholders through capital gains and while I think there is a lot of different ways to create value for shareholders. We’re confident what we’re doing and we think there is a tremendous opportunity for focusing on investing in the best private companies at a fair price and looking for opportunities to realize those a strong returns and so as it relates to our expectation I think as our portfolio is seasoning and it’s starting to demonstrate the creation and the realization of our investments. We believe we’re going to be making nice distributions to our shareholders on a regular basis. So we think kind of the long term reality of that is going to be very rewarding for the people that are shareholders.

[Operator:]

(Operator Instructions) And we’ll take our next question from Ed Woo with Ascendiant Capital.

[Ed Woo:]

Congratulations guys. Mike I know you touched on it little bit but what are some of the deans that you’re seeing out in the Silicon Valley now and have you seen any changes over the past couple of months and what’s your outlook for 2015?

[Michael Moe:]

I’m sorry Ed thanks for the question in the call. Could you say what investment themes?

[Ed Woo:]

Yeah, I just wondering what industries are out there, what sectors, what is the hot topic that most of the lot on the streets of Silicon Valley are talking about now?

[Michael Moe:]

I think there is several themes clearly marketplaces and peer-to-peer, we continue to be in an area that is very exciting and we have seen a lot of interesting names, Bill referenced a smaller investment we made DogVacay which we believe has tremendous potential which is the benchmark and recent Horvitz’s foundation in that company but effectively what DogVacay is Air BnB for pets and you see that we think there is enormous potential on transit or in the favor of that company but again we see marketplace and peer-to-peer opportunities that are very, very hot if you will in terms of interesting entrepreneurs do interesting thing. Big data which is an important theme of ours and obviously Palantir places that another company called Silicon Valley Data Sciences which we didn’t talk about. We have an investment that is doing extraordinary well. We see just a lot of very, very interesting opportunities in the big data space and you’ve seen some great situations developing which are both hot but also I think are attractive and that’s a great area. Mobile computing, our social mobile theme, our mobile computing is just very, very hot as it relates to just very interesting ideas experiencing tremendous growth in potential and then our biggest commitment is in the tech area which remains to have tremendous momentum and it’s not a mystery why? I mean they are just tremendous needs of society to find ways to make have people get their education they need to be relevant in the future and so there is CourseHero investment we made, there is tremendous interest and we were fortunate to be part of the syndicate that invested in it. But you are seeing some really exciting models and again interest from what I’d call the leading investors in that space, maybe one other theme that is not something that we have done much in but we see it bubbling up is what I call the digital doctor area and I think this is a combination of big data but also just the digitization of everything and obviously enormous market, enormous inefficiencies and a real ROI in terms of implementing more effective efficient ways to provide healthcare so those would be I guess the last piece which probably goes back to the first as premium models and you see premium models in the peer-to-peer area obviously Dropbox is a tremendous example which is our third largest investment. We love Dropbox is a great example of premium models but you are seeing a lot of great businesses being developed particularly interestingly in the B2B spaces as opposed to the B2C where the whole idea is to lower the barriers to adopt a product or service and then create network effects around it and be able to monetize the small portion to have lots of revenue and I think there is kind of B2B premium model is another area that is kind of “hot” with lot of interesting activity going on.

[Ed Woo:]

Great. Well thank you and good luck.

[Michael Moe:]

Thanks so much.

[Operator:]

And with that I would now like to turn the conference back over to Michael Moe for any additional or closing remarks.

[Michael Moe:]

I just wanted to thank our shareholders and our analysts that are following us for the continued interest in what we’re doing. We are very pleased by the progress we’re making here, we’ve got a team that’s working extraordinarily hard. We think that we’ve got a reputation that is growing and we’re very proud and excited about the portfolio that we’re creating that we’re confident will produce great results for the people that are involved with GSV. So thank you very much. We look forward to answer any follow-up questions and being in touch and talk with you next quarter and then we’ll keep that rolling. Thank you.

[Operator:]

And it does conclude today’s conference call. Thank you all for your participation. You may now disconnect.