Description

MeVC Draper Fisher Jurvetson Fund I Inc (“MVC”) is a closed end fund trading on the NYSE that makes venture capital investments. MVC went public in March 2000 during the height of internet mania at $20 per share. Needless to say, the stock price was crushed during the tech debacle in the latter half of 2000. Fortunately, MVC has not yet invested the bulk of the offering proceeds. At January 31, 2001, NAV was $18.55 per share, of which roughly $11 was held in cash and other short-term investments. (NAV changes very little on a weekly basis since all of the portfolio investments are still private and so marked at cost or below). There has been little writedown of the investments made in 2000, and quite likely there will be more to come. But even applying a hefty 50% haircut would yield a total marked down NAV of $15 per share, substantially above the current stock price. The obvious investment risk is that not only do past investments go sour, but future ones may as well. (MVC will likely continue to invest its cash over time). A couple of factors mitigate the risk: (I) the portfolio is well diversified and likely to become more so over time, (II) Draper Fisher Jurvetson is sub-advisor on the fund and is a high-quality VC with a very good track record and (III) clearly the investment climate is much more favorable for VCs with fresh money than it was a year ago, i.e. better valuations and moderated competitive environment for start-ups.

Catalyst

As with any other closed-end fund trading at a big discount from NAV, the wait can be painfully long. However, the advisors are incentivized by their override (20%) to realize investment gains on the successful portfolio investments. These gains will be distributed to shareholders, implicitly at their asset values. Also, the history of closed-end funds is that the rate of open-ending is much higher for those funds managed by investment advisors with substantial other assets under management (such as DFJ) as opposed to those funds that represent the sole “meal ticket” for their advisors.