For investors that only read the earnings headlines, a ton of additional information can usually be gleaned from the related conference calls. The recent earnings call for GSV Capital (NASDAQ: GSVC ) provided some interesting nuggets regarding Twitter (NYSE: TWTR ) and the general IPO market.
GSV Capital is a publicly traded investment fund still going through its early stages, with investments in venture-backed private companies only now developing into public firms on a constant basis. The fund provides the small investor access to pre-IPO stocks where a Twitter stake can be obtained at a lower cost than the IPO price. Unfortunately, the positions also come with a high management cost and still unpredictable results. Chegg's recent IPO could provide more insight into whether the education technology theme plays out better than the initial trading of Violin Memory (NYSE: VMEM ) .
1. Twitter stake
With the large first-day gains made by Twitter, the market probably expected a larger net asset value (NAV) increase by GSV Capital. Unfortunately, all of the gains in Twitter took place during November, so the company can't include those increases by the end of the third quarter. The good news is that the listed NAV of $13.16 at the end of September has Twitter valued at only $23.56. The current price for Twitter is around $42.
The reason Twitter is so important to the discussion and took up most of the earnings call is that it accounted for 17.6% of the net assets at the end of the third quarter. That number has since moved closer to 30%. For context, the next largest position is Palantir Technologies at $26.2 million, or only 10.3% of assets prior to the Twitter valuation increase. The company has a lock-up period of six months on this stock, so the key will be whether this huge gain can last over that period.
2. High management fees
One of the biggest concerns with this investment concept continues to be the large management fees. The fees are 2% of assets and 20% of profits. In the latest quarter, the investment management fee hit $1.3 million while total operating expenses hit $3 million. This amount was without even hitting the incentive fees of 20% that should kick in with the huge gains from the Twitter shares.
Two major reasons NAV only gained $0.29 during the third quarter were the high fees and the losses mentioned below with Violin Memory. The unrealized appreciation during the quarter was a decent $8.9 million, but the above-mentioned $3 million in expenses took a huge bite out of those gains. At the current annual run rate of over $12 million in operating expenses, the company has to generate 5% investment gains in order to just cover its operating costs. In addition, the recent $69 million convertible note and gains from Twitter will only increase the 2% management fees each quarter.
3. Violin Memory loss
Outside of high expenses, investors also have to face the potential that large losses will occur in positions such as the recent Violin Memory IPO. The flash data storage provider was expected to be a high flyer, and the company took a top five position in Violin Memory at nearly $15 million. Unfortunately, the IPO was a major bust with the release of massive losses in the S-1 filing. GSV Capital had to write down the position to a valuation of $8.2 million at the end of September. The stock has continued to fall from a level of over $7 to $3.30 currently.
Violin Memory reported earnings a few weeks ago, and the market hated the results. The company is generating fast revenue growth but couldn't change the market's perspective. At a market cap of around $275 million and sales expected to hit around $110 million in the fiscal year ending in Jan. 2014, the company trades at one of the lowest price to sales multiples of recent fast-growing IPOs.
The major reason GSV Capital has declined after a successful Twitter IPO is high costs and the realization that other failed positions impact NAV gains. The market also appears confused about the fact that the Twitter gains aren't included in the released NAV. A successful Chegg or better-than-expected numbers from Violin Memory in January could help turn the stock around; it's now trading below the NAV that is approaching near $15.
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