The public markets continue to doubt the strategy of investing in high-growth private firms, yet GSV Capital (NASDAQ:GSVC) continues to execute on its strategy and drive value higher. The recent market volatility highlights the value of investing in a diversified group of firms with a long-term horizon.
For the first quarter, GSV saw the net asset value, or NAV, remain flat sequentially at $14.91 even with a volatile market for high-growth investments whether public or private. The NAV of GSV was able to withstand the large losses in Twitter (NYSE: TWTR) by offsetting it with gains in other portfolio stocks such as Palantir Technologies and Dropbox. Investors weren't as forgiving with the stock plunging to now sit substantially below that NAV at $10. Oddly, the theme is consistent with other venture capital funds including Firsthand Technology Fund (NASDAQ:SVVC) that trades significantly below NAV as well.
The quarter was important with the successful exit of a portion of the Facebook position and the subsequent lock-up expiration of the outsized Twitter position allowing the fund to unload the shares at any time now.
Now that GSV Capital is fully grownup with mature positions and numerous that have gone public, investors can finally visualize the full investment cycle of this investment fund. The management team was clear that losses materialize quicker than the major winnings and that's starting to play out. Despite a huge sell-off, Twitter remains a significant gain for the company and Palantir Tech and Dropbox appear next inline for major IPOs.
The company has finally outlined the goal of holding stocks 18 months after an IPO.
While the typical investor can invest directly in the investments once they go public thereby losing the pre-IPO advantage provided by GSV Capital, the flexibility to hold onto stocks until attractive valuations are obtained was no more evident than the Facebook position. Considering the company establishes venture capital positions typically requiring a six-month lock-up before the company can unload the shares, GSV was forced to hold Facebook after the IPO at $45 until the stock plunged until the expiration with it trading below $20.
A requirement to unload the stock at that point would've caused a lot of harm to investors, but fortunately the GSV Capital held the stock until it surged beyond the original IPO price in the first quarter of this year. The ability to hold the stock until appropriate valuations are obtained in the public markets adds to the long-term attractiveness of investing in GSV.
More than Twitter
For the time being, Twitter will continue to dominate the headlines and even the direction of GSV Capital's stock. At the end of March, the position accounted for 28% of the portfolio.
With Twitter down significantly during May, it sure hasn't helped the NAV and of course placed it at risk of declining during the second quarter. In reality though, Palantir and Dropbox combined now have a similar impact to the valuation of GSV with those holdings combining for a 23.4% position. Those stocks no doubt face the similar tough market, but the revenue growth rates of 90% for all the holdings provide a strong fundamental backdrop for future returns.
Whether due to fears of future losses in Twitter, GSV Capital's stock now trades at a substantial discount to NAV. Enough of a discount that the board of directors agreed to a stock repurchase plan of $10 million. No better investment than buying their own stock at a deep discount to NAV over buying a private firm at current market prices during a major fund raising.
The Firsthand Technology Fund faces a similar scenario with the stock trading around $21 and the May 31 NAV at approximately $26.37. The fund only had a 13.6% position in Twitter so clearly the discount isn't all about that stock. Of course, it might not help that the fund has Facebook as the top position at 15.95%. The combined social media leaders amount to 29.5% of the fund.
The fundamentals of fast growing private firms will eventually push valuations higher for both GSV Capital and Firsthand Technology Fund and at some point investors will pay full NAV for the stocks.
Facebook was a prime example of GSV paying what most considered a high value and eventually unloading the stock at an even higher price. Twitter could well be another example of this scenario making GSV the best way to invest in that stock. If one thinks Twitter is going much higher, buy it via an investment in GSV trading substantially below NAV.
With the stock trading at $10, investors get the stock with a significant cushion for falling stock prices in both public and private firms and all of the upside of rising prices.
Mark Holder and Stone Fox Capital clients own shares of GSV Capital. The Motley Fool recommends Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.