SuRo Capital Corp (SSSS) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Sutter Rock Capital First Quarter 2020 Earnings Call. (Operator Instructions) This call is being recorded today. And I will now turn the conference over to Claire Councill. Please go ahead.

Thank you for joining us on today's call. I'm joined today by the Chief Executive Officer of Sutter Rock Capital, Mark Klein; and Chief Financial Officer, Allison Green. Please note that a slide presentation that corresponds to today's prepared remarks by management is available on our website at www.sutterrock.com under Investor Relations, Events and Presentations.

Today's call is being recorded and broadcast live on our website, www.sutterrock.com. Replay information is included in our press release issued today. This call is a property of Sutter Rock Capital and the unauthorized reproduction of this call in any form is strictly prohibited.

I would also like to call your attention to customary disclosures in today's earnings press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance or future financial condition or results and involve a number of risks, estimates and uncertainties. Actual results may differ materially from those in the forward-looking statements, as a result of a number of factors, including, but not limited to, those described from time to time in the company's filings with the SEC.

Management does not undertake to update such forward-looking statements unless required to do so by law. To obtain copies of Sutter Rock Capital's latest SEC filings, please visit our website at www.sutterrock.com or the SEC's website at sec.gov. Now I would like to turn the call over to Mark Klein.

Thank you, Claire. We are pleased to announce the result of Sutter Rock Capital's first quarter 2020. These are obviously unprecedented times we are living through and society is facing tremendous challenges. We, at Sutter Rock Capital, would like to thank the frontline workers and first responders who have put themselves at risk throughout the COVID-19 pandemic to help others. We are fortunate to report that our employees and their families are healthy, and our companies continue to function remotely, like many other firms.

Our portfolio has held up relatively well compared to the broader market indices, which experienced one of their worst quarters since the financial crisis. Our portfolio company valuations were priced as of March 31, 2020, which was 1 week of the -- within the bottom of the market sell-off. And as you all know, since that time, most of the major industries have recovered to pre-COVID levels.

I will discuss how our portfolio is fared during the onset of the COVID-19 pandemic and highlight how a few of our larger positions have experienced degrees of business acceleration during this time. To conclude, I will hand the call over to Allison Green for a brief overview. At the conclusion of our remarks, we will open the call for questions.

Let's start with Slide 3. As of March 31, 2020, net asset value was $10.22 per share, a decrease of $11.38 per share at December 31, 2019.

Please turn to Slides 4 and 5 for a review of notable developments in our investment portfolio in the first quarter and to date. Sutter Rock Capital's top 5 positions as of March 31 were Coursera, Palantir, Course Hero, Nextdoor and Aussie Media. These positions accounted for approximately 69% of the investment portfolio at fair value. As of March 31, our top 10 positions accounted for approximately 91% of the portfolio.

I would now like to walk through notable developments in a few of our largest positions. In particular, I would like to highlight our investments in online learning through our positions in Coursera and Course Hero, which represent about 1/3 of our -- in our invested portfolio. From recent media and public company earnings reports, it is evident that COVID-19 pandemic has sparked surges in demand for online and distance learning as governments and major institutions closed. We believe the effects of the COVID-19-related school closures will spark a fundamental shift in how education is and will be consumed with a clear shift to online and distance learning.

As previously announced, our largest position, Coursera, last raised $103 million in April 2019 at a $1.56 billion pre-money valuation. And in April 2020 interview with Axios, Coursera CEO, Jeff Maggioncalda, highlighted how 1.6 billion students around the world have had their schools closed to COVID-19. With 56 million learners globally, partnerships with 165 of the world's top universities and 4,200 courses on disciplines like data science, computer science, arts and humanity and social science, Coursera offers online courses that allow students to learn for free or at a low cost.

Further, in response to COVID-19, Coursera has expanded access for its Coursera for Campus product. Coursera for Campus allows colleges, universities and high schools to provide online Coursera-created educational content to their students. As a result of the program, 400,000 students have enrolled in 1.4 million courses for free.

Finally, Coursera is working with multiple state governments to offer Coursera's content catalog to unemployed individuals in those states.

Our third largest position, Course Hero, is led by CEO, Andrew Grauer, and recently raised a Series B round. In February 2020, EdSurge reported that Coursera raised a $10 million Series B round led by NewView Capital at a $1.1 billion valuation. NewView Capital also contributed $30 million to the company's employee tender program. This financing round marks Coursera's first financing since Sutter Rock Capital led it Series A in 2014.

As a result of COVID-19-related school closures, students have had less access to teachers and study groups and are increasingly turning to online learning supplements, including Course Hero's online document library for their studies. In response to the increased reliance on distance learning at this time, Course Hero has offered educators on its platform 3 months of free access to the Course Hero document library of more than 40 million teaching and learning resources. Additionally, Course Hero is facilitating peer review between educators who would like feedback on the remote teaching resources.

Our fourth largest position, Nextdoor, has gained noticeable traction during the COVID-19 pandemic. A March 2020 CNBC interview with Nextdoor's CEO, Sarah Friar, indicated the neighborhood-based social networking platform experienced an 80% month-over-month increase in daily active users since the global spread of COVID-19.

In response, Nextdoor launched Nextdoor Groups and Nextdoor Help Map to provide healthy individuals an opportunity to support neighbors in need. Nextdoor serves over 210,000 neighborhoods across 11 countries. With extended mandates for social distancing, we believe Nextdoor will become an increasingly relied upon tool for the communities and neighborhoods it serves. Ultimately, Nextdoor has tremendous upside as it expands internationally and is able to further monetize its hyperlocalized user base.

Our second-largest position, Palantir, is a leading data analytics company that continues to show positive momentum. In April 2020, the Wall Street Journal reported the Palantir's models and analysis surrounding the COVID-19 outbreak have provided critical data and information to numerous government entities, including those in the United States, the United Kingdom, Greece and others. Also in April, Bloomberg and CNBC reported Palantir anticipates generating $1 billion in 2020 revenue, allowing the company to breakeven for the first time in its history. Recent media reports imply Palantir is preparing for an IPO, although timing will be subject to market conditions. We currently hold our Palantir investment at an implied equity value of approximately $12 billion.

Within our current investment portfolio, we are continuing to see ongoing M&A activity at a few of our portfolio companies. If these transactions are consummated, they would likely result in a meaningful increase to our net asset value in the second quarter.

To put our investment portfolio into perspective, the combined value of our top 5 positions as of March 31 was $110 million or approximately 111% of Sutter Rock's market capitalization at quarter's end. We believe this dynamic emphasizes a significant risk-reward opportunity for our investors.

Please turn to Slide 6. Segmented by 6 general investment themes, the top allocation of our investment portfolio is to education technology, representing approximately 45% of the investment portfolio at fair value. Big Data and cloud was the second-largest category, representing approximately 19% of the portfolio. Our financial technology and services category accounted for approximately 15% of our portfolio at fair value, our social and media category accounted for approximately 13% of our portfolio, and marketplaces accounted for approximately 9% of our investment portfolio at fair value.

In February, we announced an expansion of our investment strategy to include private credit investments, spearheaded by Keri Findley as Senior Managing Director and senior member of the Investment Committee. Since then, our team has continued to expand our sourcing network in order to evaluate a wide array of equity and private credit investment opportunities in top VC and institutionally-backed companies that demonstrate strong operating fundamentals.

Due to ongoing market dislocation, we are seeing tremendous investment opportunities in high-quality companies at significantly low valuations as compared to just a month ago. This dislocation is presenting attractive opportunities in both equity and private credit.

We continue to target businesses that have shown to prove scaled valuation growth before a potential IPO or strategic exit. A few industries of focus include e-commerce and retail, financial technology, food technology and transportation and logistics.

Please turn to Page 7. We have committed to invest approximately $500,000 in a follow-on investment in Lime. Yesterday, Uber announced it has closed it's $170 million financing round in Lime. As part of the transaction, Uber will transfer JUMP, Uber's bike and scooter business, to Lime. We have committed to invest our pro rata share of approximately $500,000 into this financing round. Given the attractive valuation at which this follow-on investment is being made, we are confident a modest improvement of Lime business from present levels will generate a profit on our total investment. With the support of Uber, we believe Lime is financially and strategically positioned to further establish a stronghold in the micro-mobility market, particularly after social distancing requirements are reduced or limited. As the global ridesharing leader, Uber is a natural fit for Lime's business, and we believe this partnership can accelerate the success Lime was experienced prior to the spread of COVID-19.

Although it is impossible to determine the long-term impact the COVID-19 pandemic will have on the world at large, looking ahead, we believe Sutter Rock Capital is well positioned to continue to deliver long-term shareholder value as we execute against a disciplined growth investment strategy with strong tailwinds and attractive investment opportunities ahead of us.

Thank you for your attention. And with that, I will hand it over to Allison.

Thank you, Mark. I would like to follow Mark's update with a more detailed review of our financial results as of March 31, 2020, our share repurchase program, our transition to an internally-managed BDC and other ongoing expense reduction initiatives and our current liquidity position.

Before I review the financial results for the quarter, I do want to echo our March 19, 2020, press release and confirm that, to date and for the foreseeable future, Sutter Rock has been working remotely in adherence to state order to social distancing and stay-at-home mandates. We have not experienced and do not anticipate any operational disruptions during this time.

We ended the first quarter with an NAV per share of $10.22. A breakdown of NAV per share as of quarter end is shown on Slide 8 and is consistent with our financial reporting.

In sum, the decrease in NAV per share during the first quarter was largely driven by approximately $1.59 per share of net unrealized depreciation of our portfolio investment and a decrease of $0.17 per share of net investment loss. These decreases to NAV per share were offset by $0.40 per share and net realized gain on investments and a net $0.20 per share increase due to the accretive effects of common stock repurchase during the quarter through the share repurchase program.

During the first quarter, we paid the second of 2 dividends declared in late 2019. On December 20, 2019, our Board of Directors declared a dividend of $0.12 per share that was subsequently paid on January 15, 2020 to shareholders of record as of December 31, 2019. The first 2019 dividend of $0.20 per share was declared on November 5, 2019, by our Board of Directors and paid on December 12, 2019, to shareholders of record as of December 2, 2019. The dividends declared and paid have been categorized as net realized capital gains for tax purposes. These realized gains are generally attributable to the monetization of shares held in our portfolio companies that went public and other successful exits in 2019.

Please refer to Slide 9 as I review the current state of our share repurchase program. During the first quarter, the company repurchased 689,928 shares for approximately $3.7 million. As announced on our previous earnings call, on March 9, our Board of Directors authorized an additional $5 million allocation to the share repurchase program. This brought the total allocation by our Board of Directors to the share repurchase program to $30 million since the program's inception in August 2017. Subsequent to quarter end and pursuant to a 10b5-1 plan, through May 8, 2020, we have repurchased an additional 594,637 shares for approximately $3.6 million. Since inception of the share repurchase program in August 2017, we have repurchased a total of 4,452,049 shares of our common stock for approximately $27.3 million, including -- excluding, excuse me, the modified Dutch Auction tender offer effectuated in the fourth quarter of 2019.

Considering share repurchases to date, this leaves approximately $2.7 million for further repurchases under the program. Including the Q4 2019 modified Dutch Auction tender offer, Sutter Rock Capital has repurchased 5,901,324 shares of common stock for approximately $37.3 million since the inception of the share repurchase program in August 2017. This represents nearly 27% of the shares outstanding at that time.

During the first quarter, we reached the 1-year anniversary of the internalization of the management of Sutter Rock Capital, and we continue to see the cost-saving effects from the internalization. As previously discussed, as an internally managed BDC, we have a significantly reduced cost structure. Upon termination of the investment advisory agreement on March 12, 2019, we no longer pay management fees each month as management is now employed directly by the BDC, and we no longer accrue an incentive fee.

Total operating expenses decreased over 23% from $4.3 million in the first quarter of 2019, exclusive of the reversal of the incentive fee accrual to $3.3 million in the first quarter of 2020. The decrease is primarily due to the elimination of management fees, incentive fees and costs under the prior administration agreement and further supported by ongoing expense reduction initiatives separate from the inherent savings of the internalized management structure. This overall cost savings continues our years-long rigorous focus on expense reduction. To add some perspective, operating expenses for the first quarter of 2020 were approximately 40% lower than operating expenses for the first quarter of 2018 before waivers.

We anticipate seeing the full cost savings of the internalization in 2020. Together, we believe our ongoing meticulous efforts to reduce operating expenses and the meaningful cost savings we are realizing as an internally-managed BDC, will have continued positive effects on NAV. We remain diligent about managing our expense base moving forward.

Finally, I would like to review Sutter Rock Capital's current liquidity. We ended the quarter with approximately $51.3 million of cash and cash equivalents. We did not hold any public securities during the quarter or at quarter end. Our cash balance of $46.1 million as of March 31, 2020, consisted primarily of proceeds generated by the monetization of various portfolio positions from the fourth quarter of 2017 through quarter end and remaining proceeds from the issuance of $40 million, a 4.75% convertible senior notes due in 2023 during the first quarter of 2018.

Our exit of Parchment Inc. upon the January 31, 2020, closing of their merger with Credential Solutions resulted in net cash proceeds of approximately $10.8 million and a realized gain of $6.9 million during the first quarter. Major cash outflows during the quarter include continuation of an increase in allocation to the share repurchase program, the semiannual interest payment on our 4.75% convertible senior notes due 2023 and final payment of consulting and licensing agreement agreed to upon our internalization.

That concludes my comments. We would like to thank you for your interest and support of Sutter Rock Capital. And most important at this time, we'd like to wish you and your families health and safety as we work together globally to overcome COVID-19.

Now I will turn the call over to the operator to start the Q&A session. Operator?

(Operator Instructions) For our first question, we'll go to Alex Paris.

Congratulations on the quarter. You had a decline in NAV, but the decline was less than I think most people feared. My question is related to your portfolio companies. In your prepared comments, you mentioned that Palantir is the subject of IPO talk, although that's going to require, obviously, a more stable market environment. I'm wondering what other companies in your portfolio are likely to pursue an IPO track? And maybe comment on your new investment pipeline. In the press release, you talked a bit about you have some potential exciting investments that you hope to close by the end of the second quarter?

Alex, thanks. And I hope you and your family and the firm are doing well. It's obviously difficult times for all. But -- and thank you. And again, thank you for you and your firm's ongoing support to the organization. So in no particular order. In respect to Palantir, you got -- everybody's reading the same thing that we're reading. There was a lot of information in April around where the company is, what the revenue line is, the fact that they even put that out and the implications of them going public and whether they go public this year or they go public next year. It does appear that they are preparing to do so. So that is one. We did actually highlight, and I know this is something that you focus on. Clearly, our online education companies are doing extraordinarily well. If you look at some of the ones that are public, like the Chegg, you can see how the markets reacted to their extremely strong performances (technical difficulty) pandemic has impacted student learning. When we look at our portfolio sort of what could go public, it's a size and scale -- sort of size and scale. So from a size and scale perspective -- and this is not speaking out of school about any of them, but on a size and scale perspective, a company like Coursera is a company that is -- would be one that would pop up and come to mind more directly.

I think our 2 cannabis companies have stated -- cannabis REITs have stated publicly and on their initial capital raise that they intended to go public at some point in 2020. I think the world has gotten a bit complex for them. But I think the goals for those companies are to be listed as really the only one that's listed is IIPR. So on the public -- the go-public perspective, I think those 2. On the -- so we did mention that there is a fair amount of M&A activity that is in and around our portfolio. I do anticipate that those will come to fruition shortly or not, but they're at that stage where there's an anticipation that those transactions will close. Those do represent gains from a cost basis and markups from where we are right now.

So that's pretty exciting, especially given the backdrop of the fact that everybody is virtually working remotely and that those are occurring. So I think that's great. I would say, again, since we haven't closed our pipeline, it is and it should come as no surprise to anybody, there is a lot for sale right now, both on the secondary side and on the primary side, in names that we have been monitoring for the better part of 12 months or longer, names that we've done a great deal of work on, names that we had thought about investing in earlier but passed because of valuation. I do anticipate that we will have a name that we will be able to close on extremely shortly. And in fact, we're simply in the ROFR period in one of the secondary transactions. We do have a couple of primary debt transactions that we're looking at, and those are in advanced stages as well. So this is -- we are fortunate in the sense -- if you could be fortunate in an environment such as this, that we've had -- we have a fair amount of capital to deploy and that we are getting an awful lot of opportunity from both the secondary side and the primary side.

And I'll close with, although the Lime and it was -- the Lime transaction, which got a lot of attention starting 2 days ago as it was leaked in top of Uber's announcement, although it's a significant reduction to the valuation that they achieved 6, 8, 9 months ago, the construct of this transaction and the ability for us to participate on a pro rata basis truly gives us an opportunity to do quite well in the Lime investment if the valuation moves from this level, but nowhere near the levels in which we made our initial investment. So again, we are -- we couldn't be busier from a corporate perspective. And the opportunity set, as you can imagine, is extremely broad. And we are looking at everything and making decisions judiciously as -- although we do have a fair amount of capital to deploy, it is limited, and we want to utilize it to go against the best opportunities that are presented to us.

And we will take our next question from [Andrew Hart].

It'd nice to hear how the pandemic has changed the environment and your outlook for private credit investments. Are you still targeting around 20% of the assets into private credit and maybe what new opportunity could arise as a result of the pandemic?

Thank you. And while those who are focused on the credit market as opposed to the equity market understand the credit market is far more in disarray than the equity markets, which is sort of hard to fathom given the equity market plummet through March and then rebound since the third or fourth week in March. So the broadly-defined private credit market, I think, is an interesting situation. There's been billions and billions of dollars that are out there to be raised to deploy against that. And it's really in a part of the credit market that we really hadn't anticipated participating, and I still don't think we will. Again, our view on the private credit side is to look at venture-backed companies that need financing on more of an asset-based side that, for lack of a better word, would be off balance sheet. So not your traditional BDC private credit side, but it's a bit of a niche. It is a niche that Keri had identified prior to joining the organization. And it is one that we are executing against, which we have an opportunity to lend against an asset of a company and then get some sort of equity participation of the venture-backed company. So we're seeing -- as you can imagine, we're seeing an awful lot of that right now. We are progressing -- we're actually progressing fairly deeply against a couple of them right now. And as we suggested in our prepared remarks, we anticipate announcing something certainly as we get into the end of Q2. So thank you. Appreciate the call and the support of your firm.

And there are no further questions in the queue at this time. Ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.

Again, thank you all for attending our call. I hope this call finds you and your family is healthy and that we all continue to remain safe. Thank you all very much.