Description

Executive Summary

We believe that the common stock of GSV Capital Corp. (“GCV” or the “Company”) is significantly undervalued, trading at 64.5% of NAV based on an analysis of the underlying portfolio investments. Should NAV increase to the extent that we forecast, and certain catalysts cause the Company’s trading price to move closer to NAV, investors should realize significant returns over the short to medium-term.

There are, in essence, two way for investor to win in this position. First, we expect the company’s NAV to continue to grow (outlined below). Second, as the NAV grows, we expect the stock’s discount should decline as well. If the stock can trade at 85% of book value, based on our expected 6/30/2018 NAV of $10.74, that would represent a greater than 30% return for holders. We would argue this is a highly conservative outcome. '

The company will report earnings tomorrow moring (Thursday, Aug 8th) after market close. 

Company Background

GSV Capital Corp. is a publicly-traded Business Development Company (BDC) that invests in pre-IPO companies. GCV was launched in 2011 with a mandate to provide public investors with access to companies historically limited to investors of venture capital firms. While the Company has, in the past, invested in companies at the “seed” and “start-up” stage, its largest successes have been on later-stage pre-IPO companies; their early stage investments have, as a whole, been destructive to NAV.

NAV Analysis

Again, management has adjusted its strategy to concentrate on later-stage pre-IPO companies, and has moved away from making smaller early-stage investments. The number of investments in the portfolio has shrunk from over 60 at its peak to 29 in the most recent quarter (3/31/2018). The top-ten investments as a proportion of the portfolio has increased from 60% to 84% from the end of 2016 to end of 1Q 2018.  As a result, we would argue, it has become much easier to evaluate the underlying portfolio.

Two of the top-five investments in the GCV portfolio, Dropbox and Spotify, are public (and therefore easy to value) and represent a cumulative 36% of the portfolio. Lyft (representing 6% of the portfolio) raised $600 million at a pre-money valuation of $14.5 billion in June of this year. Notably, this most recent funding round, valued Lyft 14% higher than GSV’s 3/31 mark, implying further upside to the GCV’s book value. Another position GSVlabs (the firm’s incubator) raised a Series B round during the quarter at a 39% premium to 3/31.   

GSV appears to have marked Palantir—the Company’s second largest investment, representing 16% of the Book Value—roughly in-line with other public holders. However, that valuation represents a significant discount to the last financing round (as outlined below).

Based on these data-points, we believe the following adjustments should approximate the 6/30 NAV (holding all other investments equal):

Opening NAV:                                                                $9.99

Plus DBX and SPOT gains from 3/31/18:               $0.65

Plus GCV Labs capital raise:                                       $0.27

Plus Lyft capital raise valuation:                          $0.08

MINUS management fees and other expenses:    ($0.25)

Estimated 6/30/18 NAV:                                            $10.74               

To emphasize, we expect the company to post a nearly 8% increase in NAV when it reports today after the close. Further, based on current trading price of $6.93, the stock trades at a greater than 35% discount to its (clearly definable and verifiable) Book Value!

Further Opportunities for NAV Growth

Two of the top-ten investments, Lyft and Palantir, have been rumored to go public in the next twelve to eighteen months, potentially unlocking more value for shareholders. Based on its 3/31 mark, GSV values Palantir at $11.4 billion. However, the last funding round in January 2016 suggested a post-money valuation for Palantir of approximately $20 billion. While public financial statements are not available for the company, a third-party report by SharesPost (published at end of 2017), projects that Palantir could go public in 2019 with a roughly $20 billion market cap. Such a valuation could result in a pop in GCV’s NAV of approximately 12% (after backing-out management incentive fees).

Lyft, nearly 6% of the portfolio, announced an additional capital raise during the second quarter at a 14% premium to GSV’s 3/31/18 valuation. Trends for the company remain positive. According to SharesPost’s “2018 Ridesharing Report”, the ridesharing market is still essentially a duopoly with Uber and Lyft controlling over 80% of the US market. Adoption amongst surveyed users increased to over 50% of US consumers for the first time over the last twelve months. Finally, in 2017, 18% of ridesharing app users reported using Lyft most frequently, up from 10% in 2016. By contrast, Uber declined to 65% in 2017 from 76% in 2016. While, again, we do not have detailed financials for Lyft, tech investors in the last round underwrote to a $14.5 billion valuation. Presumably, these investors built a sizable cushion to the eventual IPO price in their most recent funding. In addition, IPO investors typically demand a 15-20% discount to the opening trading price as well. In short, it is easy to see how Lfyt going public could create significant value for GSV shareholders.  

GSV started an incubator program called “GSVlabs” that has assisted 170 startup to date. In exchange for a membership to the GSVlab community, which offers benefits such introductions to capital sources, mentorship opportunities and access to specialized facilities, GCV receives small equity stakes in each startup; GSV essentially get a series of call options without requiring direct investment. Companies in the network have raised over $250 million to date. While we do not have a lot of visibility into the companies in the lab, there is always the chance of a “lottery win." GSVlabs raised $7 million in a Series B round during the quarter at a 39% premium to the 3/31 mark.

Outside of these investment gains, management has taken additional steps to create shareholder value. First, the management company raised strategic capital at the end of 2017. Second, GSV has introduced more shareholder friendly initiatives such as lowering the management fees and forfeiting of a portion of the accrued incentives. Finally, the board has authorized share buybacks of up to $8.8 million, potentially resulting in accretion of $0.22 NAV/share (assuming purchases at current prices all else kept equal).

In total, we see a base case scenario where NAV could move to above $12 a share over the next year to two years (+70% return from here), even in the absence of any other positive events in the portfolio.

Appendix 1: Top 10 Investments

Appendix 2: NAV Calculation

Appendix 3: Pro Forma NAV

Catalyst

Catalysts

1.    Additional increases to NAV due to investments increasing in value from the last report

2.    Potential significant accretion from the IPO of two of the top ten holdings

3. Management buybacks, to boost share price

4.    Greater investor awareness from management non-deal roadshows scheduled over next few months.

5.    Potential structural changes considered by management that may be more appropriate for the business model. Non-BDC structure may better enable building NAV (because you don't have to pay-out all realized gains).

6.    Take private transaction to capitalize on the significant discount to intrinsic value