SuRo Capital Corp.
Q4 2014 Earnings Call Transcript

Published: 13 Mar 2015

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GSV Capital Fourth 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, March 12, 2015. I'll now turn the conference over to Nick Franco of GSV Capital. Please go ahead.

[Nick Franco:]

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. Today’s call is being recorded and broadcasted live on our website www.gsvcap.com. Replay information is included in our press release that was issued today. This call is the property of GSV Capital Corporation and the unauthorized reproduction of this call in any form is strictly prohibited. I’d also like to call your attention to customary disclosures in our press release today regarding our 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 the website at gsvcap.com. Now with that, I would like to turn the call over to Michael Moe.

[Michael Moe:]

Thank you, Nick, and good afternoon everybody. We’re delighted to have the opportunity to share with you what we believe was a very good fourth quarter with strong momentum in our portfolio and some exciting new investments. First I'll review our portfolio as of December 31, 2014 and then I'll highlight some recent developments and update you on some of the investments that we made recently. I’ll then turn it over to Chief Financial Officer, Bill Tanona who will briefly provide a financial overview and then open it up for questions. So let’s start with slide three. As of December 31, 2014, our net assets were $285.9 million or $14.80 per share. This is 2.5% decrease from our NAV as of September 30, of $15.17 per share. Twitter, GSV's largest position currently 15.5% of the total portfolio value declined in stock price over the course of the fourth quarter, from $51.58 per share on September 30, 2014 to $35.87 per share on December 31, 2014. The net effect of this resulted in a decrease in net assets of $9.8 million, or approximately $0.51 per share during the quarter. Subsequent to quarter end, Twitter's stock has increased to $47.07 per share today. Now let's turn to Slide 4. We realized $6.1 million of net realized gains in Q4. This came from a small part of our position in Palantir and IRR of 34% and liquidating our entire position in TrueCar at our IRR of 33%. The trending of our Palantir position of 6.1 million shares in no way reflects the diminishing view of Palantir's prospects quite the contrary, but we think it was prudent to take some profits while we retail a large position of approximately $45.5 million, which is 12.3% of our total portfolio. We believe Palantir has tremendous potential and is cautious from a business standpoint. Obviously, we believe it's positive that we can show other ways to monetize our position in addition to our portfolio of company going public or being sold. So we're pleased that we were able to successfully demonstrate at this time of the quarter as we did in the third quarter when we sold some Palantir as well as ZocDoc and our SinoLending position. Shareholders have continued to expect us to do this in the future. Lastly as we've stated, it's our general intention to liquidate our public positions within 18 months of going public or 12 months after the IPO lockup expires. Accordingly, we liquidated our entire TrueCar position and average price per share of $20.09 realizing a gain of $3 million for our shareholders yielding an IRR of 33%. Please turn to Slide 5. For the fourth quarter, our top 10 positions represented 60.2% of our total portfolio. Our three largest investments, Twitter, Palantir and Dropbox represented over 34% of the total portfolio. 2U, our fourth largest position reported excellent fourth quarter and for the year, the company did $110 million in revenue and has grown at 33% with reoccurring revenue. Last Monday, 2U announced a partnership that we believe is significant with Yale University to launch an online Masters of Medical Science Degree for aspiring physicians and associates. During the quarter we added to our ninth largest position, Ozy Media, a new media side that focuses on what's new and what's next, we made a $5 million follow-on investment in conjunction with the $30 million round by German Media Company Axel Springer. Ozy continues to be achieving extraordinary growth with over 10 million monthly active users and significant partnerships with groups like CNN, National Geographic and USA Today. Please turn to Slide 6 to look at the equity positions currently in the market. It's been a bumpy ride for growth investments in 2014 and while the S&P is essentially flat year to date, the volatility within the high growth names has been significant. Not surprisingly, while we continue to have an active IPO market and with 2014 having 258 new issues priced, which is the lowest in over 12 years, the first quarter witnessed volatility IPO activity has cooled off slightly. Having an open IPO market is important for us to optimize our monetization options because we've shown during the quarter we have other options for liquidity if this changes. The Wall Street Journal and Fortune both recently wrote about the Unicorn phenomenon which is a wave of previously rare almost never seen $1 billion plus value VC backed private companies. In the internet bubble, there was just one Unicorn that was present. There is now 78 companies are greater that have a $1 billion or greater market value and today, and by the way own a number of them. Palantir, Dropbox, Butterfly, Bloom Energy, Jawbone and as of today with the announced $530 million financing of Lyft, Lyft is now 12. GSV participated in the Lyft financing today adding to our previous position. The reason why there has been outbreak of Unicorn is not in our view because we are a new bubble unlike in 1999 Internet bubble where companies will be invade on the number of college dropouts in the business, most of the Unicorns meaningful businesses from a size and revenue growth standpoint including Lyft and all the Unicorn's GSV and investors. The real reason for the Unicorn megatrend is exactly the thesis of GSV Capital, which is the VC backed private companies are staying private significantly longer as well as the digital tracks are delayed to allow companies to grow at breathtaking speeds is present which Uber and Lyft wouldn’t have been possible seven years ago before the iPhone. Dropbox with over 300 million users sharing over a billion files a day because of -- is has happened because of the explosion of mobile devices in the sharing economy. Next turn to Slide Seven, where we will break our portfolio mix across growth themes as of December 31. We are constantly analyzing the growth economy and how megatrends are influencing emerging themes. As we believe that is where the mega winners will be found. The five themes we've identified education technology continues to be our largest commitment with 33.6% of the total portfolio. Cloud computing and Big Data is 28.8% of the total portfolio, social mobile is 23.2%, marketplace is 8.1% and sustainability is 6.3% of the total portfolio. I'll make mention of the education area which has been an important theme of ours and we believe represents enormous potential for GSV Capital and shareholders will be hosting our Sixth Annual ASU GSV Education Innovation Summit April 6 to 8 at Scottsdale at the Phoenicia. We will have 270 companies presenting at this conference. We'll over have over 2,000 people in attendance and we have key notes from people like Richard Branson, Howard Schultz, Secretary of Education, Arne Duncan, Evan Koslow. The summer has been a tremendous value for GSV Capital to source companies, enhance our reputation and add huge value to our Ed Tech portfolio of companies. If of interest, you should go to ASU GSV Summit website, but it’s likely we'll close registration next week or so as we already close to capacity. Now please turn to Slide Eight. In November 2014 GSV led a $50 million financing in Lytro with a $7.5 million investment alongside of Horwitz the enterprise associates and Al and Company. Lytro is the maker of the shoot now and focus laser cameras and seeks to break unique light feel technology to video and virtual reality. The technologies at Stanford and what excites us is the software which we believe could ultimately be embedded in smartphones and everything we take a photograph, The additional capital will allow Lytro to venture into new areas outside of photography including video and virtual reality. Please turn to Slide Nine. In November 2014, we participated in $25 million Series B financing in DogVacay with a $2.5 million investment. DogVacay called Airbnb for Dogs offers home dog warning with the five star pet sitters. Its online platform which has created disruptive marketplace for pet owners and pet caregivers with over one million nights booked in just over two years. It's a peer to peer range system filters and promotes great house allowing host an attractive income for their service. Other investors that participate in this round include Benchmark, Foundation Capital and First Round Capital. Now let’s turn to Slide 10, during the quarter we participated in the $30 million financing in Clever with a $2 million investment alongside Lightspeed and Sequoia. Previous investors include [indiscernible] Google Ventures and Best Smart Ventures. Clever is one of the fastest growing educational technology companies we've ever seen. The company offers application programming and interfaces that schools integrate education software with their student information systems, providing a single cyanide for all education apps. Since its launch 2.5 years ago, over 30,000 schools and 13 million students have signed up to use the company service which is an approximately 20% of all schools in U.S. Clever now works with more developers than any other company except Apple. Partners include Scholastic, Discovery, Google, DreamBox [indiscernible] among others. Moving on to Slide 11, we also made a $1 million investment in Enjoy Technology, Enjoy's CEO is Ron Johnson who ran the Apple stores before becoming CEO of J.C. Penney. Other investors in the row are Kleiner Perkins, Oak Investment Partners and Andreessen Horowitz. Enjoy is basically the Apple Genius far meets Uber. The continued growth of eCommerce and consumers love that had the latest technology is a tailwind for Enjoy. Thanks for your attention and with that, I'll turn it over to CFO, Bill Tanona.

[Bill Tanona:]

Thanks Michael. Michael already covered our portfolio of investment in great detail. I'll have you turned to Slide 12 just to give you a brief overview in terms of our change in NAV year-over-year. Year-over-year our NAV declined by $0.11, that was driven by net investment losses, net of $0.66, net realized gains net of taxes of $0.73 and net unrealized depreciation net of taxes of $0.18. I am going to spend a little bit time talking about both our current liquidity and the status of our A51 e-application. I will brief on both. Our liquid assets ended the quarter at $93 million consisting of $3.5 million of cash and $89 million of public securities now subject to lock-up agreements. At the end of the quarter, our credit facility totaled $18 million, but as of yesterday our credit facilities stood at $16 million. I want to spend a couple of minutes to give everybody an update on our pending RIC status which I know is obviously important to all of our investors. In December, we resubmitted our A51E application to the SEC to be certified as a RIC or Registered Investment Company. To date we've not received any feedback from the SEC regarding the application. We continue to believe that such feedback will come in the coming weeks. It is our understanding that the commission is treating our application as a new application instead of as a resubmission because of the significant changes we made to it and therefore they have more time to review and provide comments and feedback which is why we think it's taking longer than we originally anticipated. As you're aware from last quarter back in September of last year we filed our 2013 tax return as a RIC. As any of you are aware, we're seeking to be granted RIC status for the 2013 tax year. However, we will not be eligible to elect treatment as RIC in 2013 unless we are certified by the SEC as having been principally engaging the furnishing of capital to other corporations, which are principally engaged in the development or exploitation of inventions, technology improvements, new processes or products not previously generally available. So this is the standard that we're looking to meet to get the exemption for our A51E application. As a reminder, in the event that we do not receive SEC Certification or we otherwise aren’t able to meet all the qualifications to be treated as a RIC for 2013, we will be taxed at a C Corporation for 2013 tax year. To that end, for purposes of our financial statements though we have accrued taxes as though we were a C Corp for the 2013, 2014 tax year and if we are unable to qualify as a RIC. Should we not qualify as a RIC, we intend to elect to be treated as a RIC for our 2014 taxable year if management determines that it's in our best interest to do so. If we opt not to do so or are unable to qualify, we will continue to be taxed as a C Corp under the code for 2014 tax year. That concludes my comments and we would like to thank you for your interest. If there are no further comments from Michael we will turn it over to the operator for our question-and-answer session. Operator?

[Operator:]

And we will take our first question from Jeff Houston with Barrington Research.

[Jeff Houston:]

Hi Michael, Bill and Nick thanks for taking my questions.

[Michael Moe:]

Hi Jeff.

[Jeff Houston:]

Hi guys. Michael, you mentioned that there is over 78 Unicorns private companies with over $1 billion market cap. Could you talk about some of the factors that are causing companies to stay private longer? And then a follow-up to that is also as we -- it’s great to see exits of Palantir and TrueCar. How should we think about the portfolio exiting post IPO in the public markets versus, while they’re still private and maybe we should look for maybe a equal mix of those going forward or are you talking more of that 33% to 34% rate of return?

[Michael Moe:]

Great number of definitions, as it relates to Unicorns, it really is the primary catalyst for us starting GSV Capital, because we had witnessed this dramatic change that has taken place in the capital markets over the past dozen years, which has resulted in VC backed private companies going from an average getting monetization of that within three to four years to 14 years last year. So the reasons why that has happened many people have experienced in a significant way, which is everything from Sarbanes-Oxley, which makes it much more expensive for a small company to be public. Decimalization of trading, which has resulted in making it more difficult to support small ill-liquid stocks because there is just not enough trading or commissions to right research to make a market. And so forth you had while asset under management from mutual funds has exploded. You actually had a reduction in the number of funds. In other words you had more money managed by fewer people and so to efficiently deploy that capital just typically has resulted in growing larger market cap. There’s 100 reasons why you’ve seen this phenomenon of private company staying private longer but the gene is not going back in the bottle. And so if investors, public investors want to participate in the dramatic growth and the value creation that’s going on, you either have to figure a way the investment private companies or investment company like GSV Capital. And that’s again we think this Unicorn phenomena is a confirmation of why we’re doing what we’re doing. There’s also something that I think is really important, which is this innovation economy is really accelerating and why it’s accelerating is you had digital tracks have delayed over the past 50 years including Netscape went public 21 years ago. You now got three million people on the Internet across the globe. You got 1.5 billion smartphones. You’ve got an app economy, which is growing very, very quickly. So it allows an entrepreneur and innovator to come up with an idea like Uber or Lyft. All of a sudden you could have basically global reach and that’s what’s happening and so it’s a combination of this kind of acceleration of innovation and opportunity coupled with being private longer it’s a wonderful time to be doing what we’re doing we think and we think provide an access to public investors to participate in that is significant. Looking at the kind of portfolio management that we’ve demonstrated, third quarter we had three private positions that we look -- we monetized in some form or fashion. In the case of ZocDoc, we actually had our entire position and believe you just brought the 20% IRR. The SinoLending position was over a 150% IRR and then we sold a small portion of Palantir above the 30% IRR and then you started two positions in this quarter Palantir of 33% IRR, excuse me 34% IRR and TruCars of 33% IRR. And so when we underwrite an investment here, our minimum hurdle is 30% and the higher the risk, the higher the hurdle that we set. We’re obviously not going to always be right with our expectations for our company but certainly we’re not going to invest in a company if we don’t see 30% plus type of IRR potential. And so we’re pleased that we’re able to demonstrate this quarter and what we demonstrated last quarter shows those types of returns. The Twitter position we liquidated publicly also had north of that 30% hurdle. So we’re working hard to generate the returns that one would expect. From a portfolio we believe that that will ultimately translate into how share -- how investors look at the stock and how the stock can ultimately perform. I hope that answers your question. Thank you.

[Operator:]

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

[Blake Harper:]

Yeah, thanks first one for Bill, is there any deadline that you have as far as being tax and C Corporation that you would have to pay that or can you just delay that indefinitely until you get clarification there on the RIC status?

[Michael Moe:]

Yeah, as far as paying taxes, we wouldn’t have had to pay any taxes as a result. So it’s not like we owe the IRS any money as a result of us filing as a RIC. Clearly we’d love to have a decision sooner rather than later for purposes across the Board in terms of capital deployment and such. So obviously we’re eager to get into some type of correspondence with the SEC to ultimately get this 851E application resolved in the foreseeable future, but just to be clear, we did not owe taxes in the tax year. However, but just to be clear too, we have accrued for taxes for our unrealized gains but we're continuing to accrue that's baked into the NAV. However, as far as paying actual cash taxes we do not owe any taxes to the IRS.

[Operator:]

And we’ll take our next question from Ed Woo with Ascendiant Capital.

[Ed Woo:]

Yeah thanks for taking my question. Michael what are you seeing out there in Silicon Valley? Have you seen any major changes in themes or valuation on investment objective?

[Michael Moe:]

Yeah I think there’s a continuation of innovation and growth and I think it's really exciting. I think when you look at some of the new ways that I think are getting attention and I think are exciting include virtual reality. Virtual reality has been something people have been talking about for 20 years, but the technology is now finally here once you see commercialization and some really exciting opportunities from that. Robotics has been an area that has showed some real momentum and I think Google made something like six acquisitions of robotics companies last year. But I think you will start to see just really interesting technologies being developed around that and of course that goes into the driver of those cars and the drones and so forth. So I think it’s -- that whole area is relatively new and giving more and more attention. I think we’re just on the forefront of some areas that we’ve been involved with. Big Data and Data Science it is incredible to me to see the activity that’s going on and the businesses that are being created. Business Analytics and Data Analytics of course has been around for some time. But you're seeing Morse Law continue to impact the power and software and the ability for data scientists to create gigantic solutions and ROI for businesses and the security issues and everything else. I think data science, you're going to see some really important companies be developed from and so I think those would be a couple of observations.

[Operator:]

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

[Hannah Kim:]

Hi thanks for taking my questions. I’m calling in for in for Chris York I just wanted to touch on the recent financing that’s received and according to Wall Street Journal, I think the new investors are valuing at a much higher valuation right now. And I think it’s valued at more than $2.5 billion. Just wanted to have a better understanding of how will this impact your mark for the preferred equity investment in your portfolio for Q1? Will it be fully reflected or will there be some sort of discount that you will be using?

[Michael Moe:]

Hannah, just to be clear you’re talking about Lyft is that?

[Hannah Kim:]

Yeah Lyft.

[Michael Moe:]

Yes so -- and we want to the both accurate in terms of how we answer that as well as not disclose something that we're not allowed to disclose. I think it's fair to say the reporting that's been done on the Wall Street Journal about the live valuation, the one thing that we know that I think it’s okay to confirm that it's up nicely from where we made our investment a year ago. It won't be -- but that investment will not be reflected as of December of 31. It's not in the current numbers that we reflected in the March 31 numbers. So Lyft is a company that has got great momentum and we think yes, I think you should expect that there will be a value increase in how we carry our Lyft investment on our books.

[Operator:]

And we'll take our next question from Jon Hickman with Ladenburg.

[Jon Hickman:]

Hi Mike, I want to go back to the Unicorn, can you talk about the market that's developing for people for those Unicorn companies that are not public, but there is obviously transactions going on, because you were able to sell your position in Palantir etcetera. So where is that coming from, like can you talk about who the buyers are?

[Michael Moe:]

Yeah I think it's something that we have fully expected frankly. I would expect, I would have expected to happen faster than it has just because there is certain obvious opportunity, if you're a growth investor and historically you're public growth investor. If you wanted to participate in that activity, you got to figure ways to do it privately. I think what a lot of public investors have found is a lot more difficult to do than just buying private. Shares, but I think also the reality is the opportunity is such that more and more are trying to find ways to get involved. Certainly as you have more larger companies with more stock available, it makes it that much more realistic for institutional investors to participate and so you're seeing a variety of hedge funds and mutual funds and family offices that are increasingly putting their toe in the waters whereas to say. And again for us we think that that's great because it just gives us more options for selling securities if we thought it was in our best interest and from a sourcing standpoint, frankly our sourcing is coming much more directly from existing employees, early shareholders and so forth and not so much in the marketplaces where the institutional investors are kind of starting to experiment if you will. But the market is evolving. I think it's again -- I think it's a positive thing, for us I think it's a positive thing for the private company ecosystem and it's a natural result of the fact that it's just not as attractive to be a public company today as it once was and so if there is other options you're going to seek private company just continues to stay private until it just becomes really inevitable.

[Operator:]

At this time, there are no further questions over the phone lines. I would now like to turn the conference back to management for any additional or closing remarks.

[Michael Moe:]

Yeah, the only additional comment I'll provide is that we are very excited about what's going on at GSV Capital and what's going out at their portfolio companies. We're going to continue to work really hard for our shareholders to deliver value, which is going to be driven by the returns on investments we're making and so we'll look forward to having any follow-up questions and going to continue to be very, very active in terms of find ways to optimize our portfolio. So thank you very much for your interest and support and we look forward to following up with you in the future.

[Operator:]

This now concludes the presentation. Thank you for your participation.