Value Investors Club / GSV CAPITAL CORP (GSVC)

Description

GSV Capital (GSVC) was previously written up by ladera838 on February 4, 2013 when the stock was at $8.65. Although the stock has risen more than 40% since that time, we still feel that it represents a timely and compelling investment opportunity at this time. With the stock trading at $12.70, we think there is as much as $5 of upside to the current share price or about 40% that can be realized over the coming year.

GSVC was founded in 2011 as an investment company focused on providing capital to non-public companies with market caps between $100 million and $1 billion. GSV Capital uses marketplaces like SharePost and SecondMarket to acquire equity positions in companies focused on Social Media, Mobile Computing, Cloud Computing, Green Technology and Education Technology.

In addition to these private marketplaces, GSVC buys shares directly from company insiders and early stage VCs looking for an exit. They also invest directly in company equity offerings.

GSVC has had some major successes in 2013. The high profile IPO of Twitter and the dramatic rise of Facebook from the list of broken IPOs have increased the NAV of GSVC since ladera838’s write-up in February. There have been some real duds in 2013 too with the IPO flops of Violin Memory and Chegg leading the list of worst IPOs for the year.

Top 12 Holdings

Below is a list of GSV Capital’s top twelve holdings along with recent their most recent valuation. We spoke to GSVCs IR and tried to get more accurate information on fully diluted share count for their holdings and/or valuation methodology, but they were unwilling to provide this information. So we relied on all publically trading information we could find. "Shares", "Cost", "Fair Value", and "% of Net Assets" is as of the last 10Q. "Current Fair Value" and "Value per Share" we compiled using all publically available information we could find since September 31st.

Portfolio Investments*	Shares		Cost	Fair Value	% of Net Assets		Current Fair Value	Value per Share
Twitter, Inc.
Common shares		1,835,600	31,755,821	43,242,147	17	%
Preferred shares, Series A		65,000	1,235,290	1,531,238	0.6	%
Total			32,991,111	44,773,385	17.6	%	116,410,801	$ 6.03
Palantir Technologies, Inc.
Common shares, Class A		7,145,690	20,051,479	25,081,372	9.86	%
Preferred shares, Series G		326,797	1,008,968	1,147,057	0.45	%
Total			21,060,447	26,228,429	10.31	%	39,342,644	$ 2.04
Dropbox, Inc.
Common share		760,000	8,641,153	8,740,000	3.44	%
Preferred shares, Series A-1		552,486	5,015,333	6,353,589	2.5	%
Total			13,656,486	15,093,589	5.94	%	30,187,178	$ 1.56
Chegg, Inc.⁽¹⁶⁾
Common shares		849,462	10,014,248	9,580,153	3.77	%
Preferred shares, Series F		333,333	4,008,654	4,555,431	1.79	%
Total			14,022,902	14,135,584	5.56	%	11,250,120	$ 0.58
Control4 Corporation^(9)(10)
Common shares		782,821	7,011,025	12,473,776	4.9	%	12,099,563	$ 0.63
Solexel, Inc.
Preferred shares, Series C		5,034,324	11,017,224	10,999,997	4.33	%	10,999,997	$ 0.57
2U, Inc. (f/k/a 2tor, Inc.)
Common shares		1,151,802	8,757,668	9,472,352	3.72	%
Preferred shares, Series A		167,431	1,273,125	1,376,943	0.54	%
Total			10,030,793	10,849,295	4.26	%	10,849,295	$ 0.56
Avenues World Holdings LLC⁽³⁾
Preferred shares, Class A-1		5,000,000	10,028,361	10,423,016	4.1	%	10,423,016	$ 0.54
Coursera, Inc.
Preferred shares, Series B		2,039,609	9,999,999	9,999,998	3.93	%	9,999,998	$ 0.52
Facebook, Inc.⁽⁷⁾
Common shares, Class A		175,000	5,236,147	8,790,250	3.46	%	10,108,787	$ 0.52
Violin Memory, Inc.⁽¹¹⁾
Common Shares		1,233,333	14,819,618	8,158,498	3.21	%	4,360,617	$ 0.23
SugarCRM, Inc.
Common shares		1,480,131	5,193,947	5,602,296	2.2	%
Preferred shares, Series E		373,134	1,500,522	1,857,408	0.73	%
Total			6,694,469	7,459,704	2.93	%	7,459,704	$ 0.39

Continuing on through all their holdings you get a current NAV of ~$17.20 compared to $13.17 on 9/31/13. Note that we assume Palantir and Dropbox complete their recently announced funding rounds at the indicated valuations.

Historic Discount to NAV

We estimate GSVC’s current discount to NAV to be 27%. When their latest 10Q was released on November 12 with the detailed holdings report, the stock was trading at $12.70 for a discount to NAV of 3.2%. Historically there has been a wide disparity in their premium/discount to NAV. Here is the detail since their IPO.

Q Release Date	NAV	Stock Price	Discount/Premium
8/16/2011	$ 13.57	$ 14.69	8%
11/16/2011	$ 13.26	$ 14.57	10%
3/13/2012	$ 12.95	$ 18.08	40%
5/7/2012	$ 13.47	$ 17.18	28%
8/9/2012	$ 13.81	$ 9.36	-32%
11/7/2012	$ 13.45	$ 7.02	-48%
3/14/2013	$ 13.07	$ 7.92	-39%
5/9/2013	$ 12.69	$ 7.57	-40%
8/9/2013	$ 12.87	$ 11.82	-8%
11/12/2013	$ 13.16	$ 12.72	-3%
		Average	-8.6%
		Median	-5.8%

As you can see from the detail, today’s current discount of 27% compares very favorably to their historic discount of 5.8%. The time that GSVC traded at a large premium was just prior to the Facebook IPO. After the Facebook IPO and its subsequent drop into the teens, GSVC’s share price plunged and its discount to NAV ballooned to nearly 50%. The share price rallied from the large discount to a premium again in October leading up to the Twitter IPO. The stock peaked recently at $16.90 on October 21^st, just a couple weeks before the Twitter IPO launch.

2014 Catalysts and Recent Activity

Clearly it is not enough for GSVC to just trade at a discount to make it a good investment. The share price needs a catalyst to grab the publics’ attention. 2014 should bring at least two high profile IPOs.

GSVC’s second largest holding is in Palantir Technologies. Palantir is on its way to raising $700M in VC funding. They are in the process now of raising $100M in funding at a $9B valuation. In September, Palantir completed a round of funding at a $6B valuation. Palantir is involved in data mining for high profile Fortune 500 companies and various government agencies. In 2013 they should do $400M in revenue and expect to sign over $1B in new contracts in 2014. It is expected that Palantir will go public in 2014 and with the quantity of money raised to date it should be a very high profile IPO.

With 200M users, it is likely that most of you have used Dropbox at one time or another. Dropbox is in the process of raising $250M at an $8B valuation. I have no visibility on the merits of the investment in Dropbox. However, I would expect to see a reasonable amount of hype around the IPO, which is also expected to take place in 2014. Dropbox is GSVC third largest holding.

SugarCRM, their 11^th largest holding completed a $40M round of funding with Goldman in August 2013.

http://www.pehub.com/2013/08/goldman-sachs-invests-40m-sugarcrm/

Coursera, Inc, their 8^th largest holding completed a B round of funding with Kleiner Perkins in November.

http://investing.businessweek.com/research/markets/news/article.asp?docKey=600-201311221249MRKTWIREUSPR_____1071083-1

Solexel, Inc. completed a C round of funding in June where GSVC made their initial investment.

Incentive Payments

In the Q&A portion of the previous GSVC write-up there were some questions about the incentive structure that was not completely addressed. GSVC’s incentive structure is very convoluted to say the least. The fact that they’ve never made an incentive payment adds to the confusion.

The incentive structure works on a deal by deal basis but after deducting all of the unrealized and realized gains and losses.

GSVC has both a Hurdle rate which is 8% and a Catch-up rate which is 100% of the gains between 8 and 10%. Above the 10% threshold, GSVC pays a 20% incentive fee. Both the Hurdle and Catch-up rates are non-compounded cumulative rates of return.

GSVC gives examples in their N-2 of how they calculate their incentive payments. However, we believe the examples exclude the catch-up payment calculations. Basically with the Catch-up payment, GSVC will pay an incentive fee of 20% on any investment where they make more than a 10% IRR assuming there are no unrealized losses to offset the gain. GSVC also states in the N-2 that they will never pay over 20% of their realized capital gains in any calendar year. We’ve talked to IR about the incentive structure, but they just keep pointing us to the N-2. We assume as they’ve never made any incentive payments they feel it is a low priority item to get their heads around.

GSVC first made the investment in Twitter over two years ago. They participated in a follow on offering in mid-2012. Given their cost basis of $33M and the time they’ve held the investment, the maximum hit to NAV on the incentive payment is about $16M or about $.80 per share.

Risks

The big risk to GSVC is the TWTR share price. However, this risk can easily be hedged away through a TWTR short or option strategies. TWTR currently represents over $6 of GSVC’s NAV based on a trading price of $70 per share. Shorting TWTR at a 35% value to your GSVC position would effectively hedge away the TWTR risk to NAV.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

When we first started working on this write-up, GSVC stock price was at $11 per share last week. The stock price has run recently due to the continuing rally in the shares of TWTR. Investors could choose to wait and see if the stock pulls back or buy here and hedge some of the TWTR exposure.

Per the write-up, the big GSVC catalysts are high profile IPOs. We believe Palantir should be a big 2014 event. Dropbox as well as other top 12 holdings could see 2014 IPOs or liquidity events. Given the stocks trading history, it is likely the Palantir and/or Dropbox IPOs could push the stock price well above GSVCs NAV of ~$17 per share.

The final catalyst could be the next NAV report, which will show a valuation well above last 10Qs $13.17. Historically this has not done a lot to propel the shares higher, but an NAV approaching a 30% discount with some high profile liquid holdings could provide the necessary catalyst.

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			2013	2014
Price:	12.70	EPS	$0.00	$0.00
Shares Out. (in M):	19	P/E	0.0x	0.0x
Market Cap (in $M):	245	P/FCF	0.0x	0.0x
Net Debt (in $M):	40	EBIT	0	0
TEV (in $M):	285	TEV/EBIT	0.0x	0.0x