Description

I previously wrote up SuRo Capital (SSSS) under its previous incarnation, GSV Capital, in February 2013.  SuRo Capital, formerly Sutter Rock Capital and, before that, GSV Capital, is a business development company (BDC) designed to provide access to high-growth, venture- capital-backed emerging private companies.  (I dislike the name SuRo, but the name shows good management decision-making; reportedly, SuRo (contraction of Sutter Rock) management got sued by Sutter Hill for having a similar name after it changed from GSV Capital to Sutter Rock Capital, and rather than spend a projected million dollars in legal fees fighting Sutter Hill, SuRo management just changed the name again).

According to its 10-K, SuRo’s investment objective is to maximize our total portfolio return, principally by seeking capital gains on equity and equity-related investments, and to a lesser extent, income from debt investments. 

SSSS has adopted the following business strategies to achieve our investment objective:

Identify high quality growth companies.   Based on our extensive experience in analyzing technology trends and markets, we have identified several technology sub-sectors, including social mobile, big data and cloud, marketplaces, and education technology, as opportunities where we believe companies are capable of producing substantial growth. We rely on our collective industry knowledge as well as an understanding of where leading venture capitalists and other institutional investors are investing.

We leverage a combination of our relationships throughout Silicon Valley and our independent research to identify leaders in our targeted sub-sectors that we believe are differentiated and best positioned for sustained growth. Our team continues to expand our sourcing network in order to evaluate a wide range of investment opportunities in companies that demonstrate strong operating fundamentals. We are targeting businesses that have been shown to provide scaled valuation growth before a potential IPO or strategic exit. 

Acquire positions in targeted investments.   We seek to selectively add to our portfolio by sourcing investments at an acceptable price through our disciplined investing strategy. To this end, we utilize multiple methods to acquire equity stakes in private companies that are not available to many individual investors.

Direct equity investments.   We seek direct investments in private companies. There is a large market among emerging private companies for equity capital investments. Many of these companies, particularly within the technology sector, lack the necessary cash flows to sustain substantial amounts of debt, and therefore have viewed equity capital as a more attractive long-term financing tool. We seek to be a source of such equity capital as a means of investing in these companies and look for opportunities to invest alongside other venture capital and private equity investors with whom we have established relationships.

Private secondary marketplaces and direct share purchases.  We also utilize private secondary marketplaces as a means to acquire equity and equity-related interests in privately held companies that meet our investment criteria and that we believe are attractive candidates for investment. We believe that such markets offer new channels for access to equity investments in private companies and provide a potential source of liquidity should we decide to exit an investment. In addition, we also purchase shares directly from stockholders, including current or former employees. As certain companies grow and experience significant increased value while remaining private, employees and other stockholders may seek liquidity by selling shares directly to a third party or to a third party via a secondary marketplace. Sales of shares in private companies are typically restricted by contractual transfer restrictions and may be further restricted by provisions in company charter documents, investor rights of first refusal and co-sale and company employment and trading policies, which may impose strict limits on transfer. We believe that the reputation of our investment professionals within the industry and established history of investing affords us a favorable position when seeking approval for a purchase of shares subject to such limitations.

Create access to a varied investment portfolio. We seek to hold a varied portfolio of non-controlling equity investments, which we believe will minimize the impact on our portfolio of a negative downturn at any one specific company. We believe that our relatively varied portfolio will provide a convenient means for accredited and non-accredited individual investors to obtain access to an asset class that has generally been limited to venture capital, private equity and similar large institutional investors.

On and effective June 22, 2020, SSSS changed its name to “SuRo Capital Corp.” from “Sutter Rock Capital Corp.” On and effective March 12, 2019, the SSSS board of directors ("Board of Directors") approved internalizing its operating structure and SSSS began operating as an internally-managed non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. The SSSS Board of Directors approved the internalization in order to better align the interests of the Company’s stockholders with its management. As an internally managed BDC, the Company is managed by its employees, rather than the employees of an external investment adviser, thereby allowing for greater transparency to stockholders through robust disclosure regarding the Company’s compensation structure. SSSS no longer pays any fees or expenses under an investment advisory agreement or administration agreement, and instead pays the operating costs associated with employing investment management professionals including, without limitation, compensation expenses related to salaries, discretionary bonuses and restricted stock grants. 

Four factors make SSSS an attractive investment at this time:

1)     SSSS trades at a meaningful discount to its NAV;

2)     Statements by SSSS management imply that SSSS will make large distributions later in 2021, with some beneficial consequences discussed below;

3)     SSSS management has shown itself to be shareholder-friendly when it comes to capital management, which implies it is likely to liquidate its holdings that have significantly appreciated and potentially take steps that would narrow the stock price discount to NAV; and

4)     With the recent IPO of Coursera (COUR), a significant portion of SSSS NAV can be hedged in public markets.

The following January 2021 presentation on the SSSS web-site provides useful background: https://investors.surocap.com/static-files/f1af6e27-80ef-4c80-a3cc-5f0b999fd547

The portfolio consists of cash plus a portfolio of private companies plus shares in Coursera (COUR), which is a private holding that recently went public.

At December 31, 2020, SuRo Capital held positions in 27 portfolio companies with an aggregate fair value of approximately $281MM.  As a result of the Company’s ongoing strategy to increase the size of its investments in individual portfolio companies, SuRo Capital continues to consolidate its investment portfolio around its top positions. The Company’s top five portfolio company investments accounted for approximately 73% of the total investment portfolio at fair value as of December 31, 2020.

Calculated below is the 12/31/20 list of five largest positions along with two significant highlighted changes:

** The holdings in Palantir (PLTR) were sold during the first quarter of 2021 for $123MM (gain of $111MM).  Coursera IPO’d in March 2021, and SuRo’s stake of 3.13 MM shares was worth $143MM on 4/2/21 (gain of $126MM).

Note also that there is generally positive buzz around Course Hero and Nextdoor, with the potential for public market valuations to significantly exceed private carrying values.

Provide below is the SSSS balance sheet as of 12/31/20, adjusted for the sale of PLTR, the IPO of COUR and the redemption in February 2021 of $38.2MM in SSSS Convertible Senior Notes for 4.11 MM shares.

** Ignores two $0.25 dividends declared in 2021.

From the 10-K, it seems like a good bet that SSSS will distribute most of its capital gains in the year it was realized:

SSSS has elected to be treated, and intends to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended.  

In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually, we may in the future decide to retain such capital gains for investment. If this happens, our stockholders will be treated as if they received an actual distribution of the capital gains we retain and reinvested the net after-tax proceeds in us.

Given that SSSS has plenty of cash (plus T-bills) on its balance sheet, distributions of capital gains should not hamper its ability to make new investments.

Finally, from page 17 of January 2021 presentation https://investors.surocap.com/static-files/f1af6e27-80ef-4c80-a3cc-5f0b999fd547, the management appears to be quite shareholder-friendly in terms of capital management, issuing shares when they traded at a premium to NAV (starting in 8/20) and repurchasing shares when they traded at a significant discount to NAV (from 8/17-12/20). This kind of capital management should narrow the discount to NAV over time and result in SSSS selling shares (like COUR) when large gains have been achieved.

Here are three scenarios in which investors can profit from SSSS:

Note that shares of COUR are subject to a staggered release from lock-up restrictions, but investors in SSSS can short COUR easily at a borrow rate of 0.25% currently.

Catalyst

IPOs of some additional private portfolio companies, share repurchases, capital gains distributions