Description

Crossroads Capital (XRDC) is a sub-scale business development company that is now in liquidation and which is trading at half its estimated liquidation value.  Cash represents more than 60% of the company’s market value, and control is in the hands of a well-known activist investor - Bulldog Investors. 

History

The company was formed in 2008 to invest in late stage pre-IPO venture capital situations. It was initially funded through private placements to retail investors. (Minimum investment was $5,000.) It listed on NASDAQ in 2011 under the name Keating Capital, and had a handful of successful exits (Lifelock, TrueCar, Xtime). The stock was sold to the public at $10 per share and has traded lower ever since.  In 2014, the portfolio manager, Tim Keating, sold the investment advisor to AR Capital, and the company changed its name to BDCA Ventures. (AR Capital is an affiliate of American Realty Capital, which was controlled by Nicholas Schorsch, who is well known to many VIC members.)

Bulldog Investors (Phil Goldstein and Andrew Dakos) led a proxy fight in 2015, which culminated in the removal of the incumbent Board, the resignation of Mr. Keating, the termination of the management contract and yet another name change, this time to Crossroads Capital (XRDC). In January 2016 the company amended its “investment objective to now be the preservation of capital and maximization of shareholder value.”  The company plans to pursue the sale of its remaining investments and return capital to shareholders.

In many ways, this is as much a bet on the jockeys as it is on the horse. Bulldog has along history of extracting value from closed end funds and other special situation entities.

Valuation

At this point the company has just 12 investments, plus $1.48 per share in cash.

Eleven of the 12 investments are in private companies, so the valuations are subject to a great deal of judgment.  However, at the current market price of XRDC, the value of the 12 investments would have to fall by more than 60% before this investment would lose money.

The table below shows XRDC’s portfolio as of January 31, 2015:

There have been a couple of minor developments with the portfolio subsequent to year end:

            $600,000 was released from the escrow account

            Suniva was sold for stock to a Chinese company

The lock-up on Tremor Video (the only public company in the portfolio) expired in February.

XRDC invested another $250,000 in Harvest Power

Risks

Valuation of pre-IPO companies is subjective at best.  

The market for IPOs has essentially closed in 2016.  If it remains closed, the portfolio companies may need to raise capital at lower valuations, and it may be a long time before exits are realized.

Liquidations generally take longer than planned.  While it may take several years to liquidate the portfolio, new management is aggressively focused on reducing costs.   There is also a possibility that someone might be interested in acquiring the whole company.

Several of the portfolio companies are not great businesses. (Zoosk, for example is an on-line dating company that failed to go public and is likely to be written down further.)

Catalyst

An exit from one or more of the larger holdings, followed by a distribution to shareholders.