SuRo Capital Corp (SSSS) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to the GSV Capital fourth-quarter 2014 earnings conference call.

(Operator Instructions)

This call is being recorded today, Thursday, March 12, 2015. I will now turn the conference over to Nick Franco, GSV Capital. Please go ahead.

Thank you for joining us on today's call. I'm joined today by GSV Chairman, CEO and Chief Investment Officer Michael Moe and Chief Financial Officer Bill Tanona. Please note that a slide presentation that corresponds to today's prepared remarks by management is available on our website at www.gsvcap.com under investors events and presentations.

Today's call is being recorded and broadcast live on our website www.gsvcap.com. Replay information is included in our press release that was issued today. This call is the property of GSV Capital Corp. and the unauthorized reproduction of this call in any form is strictly prohibited.

I'd also like to call your attention to customary disclosures in our press release today regarding our forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements which relate to future events or 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 GSV Capital's latest SEC filings please visit the website at GSVcap.com.

Now I'd like to turn the call over to Michael Moe.

Thank you Nick and good afternoon everybody. We're delighted to have the opportunity to share with you what we believe was a good fourth quarter with strong momentum in our portfolio and some exciting new investments.

First I'll review our portfolio as of December 31, 2014 then I'll highlight some recent developments and update you on some of the investments that we made recently. I'll then turn it over to Chief Financial Officer Bill Tanona who will briefly provide a financial overview and then open it up for questions.

So let's start with slide 3. As of December 31, 2014 our net assets were $285.9 million, or $14.80 per share. This is a 2.5% decrease from our NAV at September 30 of $15.17 per share.

Twitter, GSV's largest position, currently 15.5% of the total portfolio value declined in stock price over the course of the fourth quarter from $51.58 per share on September 30, 2014 to $35.87 per share on December 31, 2014. The net effect of this resulted in a decrease of net assets of $9.8 million, or approximately $0.51 per share during the quarter. Subsequent to quarter-end Twitter stock has increased to $47.07 per share today.

Now let's turn to slide 4. We realized $6.1 million of net realized gains in Q4. This came from selling a small part of our position in Palantir at an IRR of 34% and liquidating our entire position in TrueCar at an IRR of 33%.

The trimming of our Palantir position to 6.1 million shares in no way reflects a diminishing view of Palantir's prospects, quite the contrary. But we think it was prudent to take some profits while retaining a large position of approximately $45.5 million which is 12.3% of our total portfolio. We believe Palantir has tremendous potential and is crushing it from a business standpoint.

Obviously we believe it's positive that we could show other ways to monetize our position in addition to our portfolio company going public or being sold. So we're my pleased that we were able to successfully demonstrate this during the quarter as we did in the third quarter when we sold some Palantir as well as ZocDoc and our Sino lending position. Shareholders should continue to expect us to do this in the future.

Lastly as we stated, it's our general intention to liquidate our public positions within 18 months of going public or 12 months after the IPO lockup expires. Accordingly we've liquidated our entire TrueCar position at an average price per share of $20.09, realizing a gain of $3 million for our shareholders yielding an IRR of 33%.

Please turn to slide 5. For the fourth quarter our top 10 positions represented 60.2% of our total portfolio. Our three largest investments Twitter, Palantir and Dropbox represented over 34% of the total portfolio.

2U, our fourth largest position, recorded excellent fourth quarter and for the year the company did $110 million of revenue and is growing 33% with reoccurring revenue. Last Monday 2U announced a partnership that we believe is significant with Yale University to launch an online Master's of Medical Science degree for aspiring physician associates.

During the quarter we added to our ninth largest position Ozy Media, a new media site that focuses on what's new and what's next. We made a $5 million follow-on investment in conjunction with the $30 million round done by German media company Axel Springer. Ozy continues to be achieving extraordinary growth with over 10 million monthly active users and significant partnerships with groups like CNN, National Geographic and USA Today.

Please turn to slide 6 to look at the equity positions and some commentary on the market. It's been a bumpy ride for growth investors in 2014 and while the S&P is essentially flat year to date the volatility within the high-growth names has been significant. Not surprisingly, while we continue to have an active IPO market and with 2014 having 258 new issues priced which is the most in over 12 years, the first quarter with this volatility IPO activity has cooled off slightly.

Having an open IPO market is important for us to optimize our monetization options. As we've shown during the quarter we have other options for liquidity if this changes.

The Wall Street Journal and Fortune both recently wrote about the unicorn phenomenon which is this wave of previously rare, almost never seen $1 billion-plus valued VC-backed private companies. In the Internet bubble there was just one unicorn sighting that was present. There is now 78 companies or greater that have $1 billion or greater market value.

And today by the way we own a number of them. Palantir, Dropbox, Spotify, Bloom Energy, Jawbone and as of today with the announced $530 million financing of Lyft, Lyft is now one, too. GSV participated in the Lyft financing today adding to our previous position.

The reason why there's been an outbreak of unicorn is not in our view because we are in a new bubble. Unlike in 1999 Internet bubble where companies were being vetted on the number of college dropouts in the business, most of the unicorns have meaningful businesses from a size and revenue growth standpoint including Lyft and all the unicorns GSV is an investor in.

The real reason for the unicorn megatrend is exactly the thesis of GSV Capital which is the VC-backed private companies are staying private significantly longer as well as the digital tracks have been laid to allow companies to grow at breathtaking speeds is present, Uber and Lyft wouldn't have been possible seven years ago before the iPhone. Dropbox with over 300 million users sharing over 1 billion files a day because is happening because of the explosion of multiple devices and the sharing economy.

Next turn to slide 7 where we will break out portfolio mix across growth themes as of December 31. We are constantly analyzing the growth economy and how megatrends are influencing emerging themes as we believe that is where the megawinners will be found.

Of the five themes we've identified education technology continues to be our largest commitment with 33.6% of the total portfolio. Cloud computing and big data is 28.8% of the total portfolio. Social/mobile is 23.2%, marketplaces is 8.1% and sustainability is 6.3% of the total portfolio.

I'll make mention of education area which has been an important theme of ours and we believe represents enormous potential for GSV Capital and our shareholders. We will be hosting our Sixth Annual ASU GSV Education Innovation Summit April 6 through 8 in Scottsdale at the Phoenician.

We will have 270 companies presenting at this conference. We will have over 2,000 people in attendance and we have keynotes from people like Richard Branson, Howard Schultz, Secretary of Education Arne Duncan and Vinod Khosla.

The summit has been a tremendous value for GSV Capital to source companies, enhance our reputation and add huge value to our Ed Tech portfolio companies. If of interest you should go to the ASU GSV Summit website but it's likely we will close registration in the next week or so as we are already close to capacity.

Now please turn to slide 8. In November 2014 GSV led a $50 million financing in Lytro with a $7.5 million investment alongside of Andreessen Horowitz, new enterprise associates and Allen Company. Lytro is the maker of the shoot now and focus later cameras and seeks to bring unique light field technology to video and virtual reality.

The technology is out of Stanford and what excites us is the software which we believe could ultimately be embedded in smartphones and everything where you take a photograph. The additional capital will allow Lytro to venture into new areas outside of photography including video and virtual reality.

Please turn to slide 9. In November 2014 we participated in a $25 million Series B financing in DogVacay with a $2.5 million investment.

DogVacay called the Airbnb for dogs offers home dog boarding with five-star pet sitters. It's online platform that has created disruptive marketplace for pet owners and pet caregivers with over 1 million nights booked in just over two years.

It's a peer-to-peer rating system filters and promotes great hosts allowing hosts to earn attractive income for their service. Other investors that participate in this round include Benchmark Foundation Capital and First Round Capital.

Now let's turn to slide 10. During the quarter we participated in a $30 million financing in Clever with a $2 million investment alongside Lightspeed and Sequoia. Previous investors include Y Combinator, Google Ventures and Bessemer Ventures.

Clever is one of the fastest-growing educational technology companies we've ever seen. The company offers application programming and interfaces that let schools integrate educational software with their student information systems providing a single sign-on for all educational apps. Since its launch to an half years ago, over 30,000 schools and 13 million students have signed up to use the company's service which is approximately 20% of all schools in the US.

Clever now works with more developers than any other company except Apple. Partners include Scholastic, Discovery, Google, Dreambox, Khan Academy, Rosetta Stone among others.

Moving on to slide 11, we also made a $1 million investment in ENJOY Technology. ENJOY's CEO is Ron Johnson who ran the Apple stores before becoming CEO of JCPenney. Other investors in the round were Kleiner Perkins, Oak Investment Partners and Andreessen Horowitz.

ENJOY is basically the Apple Genius Bar meets Uber. The continued growth of e-commerce and consumers' love of having the latest greatest technology is a tailwind for ENJOY.

Thanks for your attention. With that I will turn it over to our CFO, Bill Tanona.

Thanks, Michael. Michael already covered our portfolio investments in great detail.

I'll have you turn to slide 12 just to give you a brief overview in terms of our changing NAV year over year. Year over year our NAV declined by $0.11. That was driven by net investment losses net of $0.66, net realized gains net of taxes of $0.73 and net unrealized appreciation net of taxes of $0.18.

I'm going to spend a little bit of time talking about both our current liquidity and the status of our 851(e) application. I'll be brief on both.

Our liquid assets ended the quarter at $93 million consisting of $3.5 million of cash and $89 million of public securities not subject to lockup agreements. At the end of the quarter our credit facility totaled $18 million but as of yesterday our credit facility stood at $16 million.

I want to spend a couple of minutes to give everybody an update on our pending RIC status which I know is obviously important to all of our investors. In December we resubmitted our 851(e) application to the SEC to be certified as a RIC or registered investment company. To date we have not received any feedback from the SEC regarding the application.

We continue to believe that such feedback will come in the coming weeks. It is our understanding that the commission is treating our application as a new application instead of as a resubmission because of the significant changes we made to it and therefore they have more time to review and will provide comments and feedback which is why we think it's taking longer than we originally anticipated.

As you are aware from last quarter, back in September of last year we filed our 2013 tax return as a RIC. As many of you are aware we are seeking to be granted RIC status for the 2013 tax year. However we will not be eligible to elect treatment as RIC in 2013 unless we're certified by the SEC as having been principally engaged in the furnishing of capital to other corporations which are principally engaged in the development or exploitation of inventions, technology, improvements, new processes or products not previously generally available.

So this is the standard that we're looking to meet to get the exemption for our 851(e) application. As a reminder, in the event that we do not receive SEC certification or we otherwise are unable to meet all the qualifications to be treated as a RIC for 2013, we will be taxed as a C corporation for the 2013 tax year. To that end for purposes of our financial statements, though, we have accrued taxes as though we were a C corp. for the 2013-2014 tax year if we are unable to qualify as a RIC.

Should we not qualify as a RIC we intend to elect to be treated as a RIC for our 2014 taxable year if management determines that it is in our best interest to do so. If we opt not to do so or are unable to qualify we will continue to be taxed as a C corp. under the code for the 2014 tax year.

That concludes my comments and I would like to thank you for your interest. If there are no further comments from Michael we will turn it over to the operator for question-and-answer session. Operator?

(Operator Instructions) Jeff Houston, Barrington Research.

Hi, Michael, Bill and Nick. Thanks for taking my questions.

Michael, you mentioned that there's over 78 unicorns, private companies with over $1 billion market cap. Could you talk about some of the factors that are causing companies to stay private longer?

And then a follow-up to that is also as we -- it's great to see the exits of Palantir and TrueCar. How should we think about the portfolio exiting post-IPO in the public markets versus while they are still private and should we look for maybe an equal mix of those going forward or are you targeting more of that 33% to 34% rate of return?

A number of different issues. As it relates to unicorns it really is the primary catalyst for us starting GSV Capital because we had witnessed this dramatic change that has taken place in the capital markets over the past dozen years which has resulted in VC-backed private companies going from on average getting monetization event within 3 to 4 years to 14 years last year.

So there's just this -- the reasons why that happened many people have experienced in a significant way which is everything from Sarbanes-Oxley which makes it much more expensive for a small company to be public, decimalization of trading which has resulted in making it more difficult to support small illiquid stocks because there's just not enough trading or commissions to write research to make a market and so forth. You've had assets under management for mutual funds has exploded, you've actually had a reduction in the number of funds so in other words you've got more money managed by fewer people and so to efficiently deploy that capital just typically has resulted in growing a larger market. There's 100 reasons why you've seen this phenomenon of private companies staying private longer but the genie is not going back in the bottle.

And so if investors, public investors want to participate in the dramatic growth in the value creation that's going on you either have to figure a way to invest in private companies or invest in a company like GSV Capital. And that's again we think this kind of unicorn phenomena is a confirmation of why we're doing what we're doing.

There's also something that I think is really important which is this innovation economy is really accelerating. And why it's accelerating is you've had digital tracks have been laid over the past 50 years including Netscape went public 21 years ago.

You now have got 3 million people on the Internet across the globe, you've got 1.5 billion smartphones, you've got an app economy which is growing very, very quickly. So it allows an entrepreneur and an innovator to come up with an idea like Uber or Lyft and all of a sudden you can have basically global reach. And that's what's happening.

So it's a combination of this kind of acceleration of innovation and opportunity coupled with being private longer it's a wonderful time to be doing what we're doing we think. And we think providing access to public investors to participate in that is significant.

Looking at the portfolio management that we've demonstrated the third quarter we had three private positions that we monetized in some form or fashion. In the case of ZocDoc we exited our entire position at I believe just around a 20% IRR. The Sino lending position was over 150% IRR and then we sold a small portion of Palantir above a 30% IRR and then you saw the two position this quarter of Palantir was a 33% IRR, excuse me, a 34% IRR and TrueCar was a 33% IRR.

So when we underwrite an investment here our minimum hurdle is 30% and the higher the risk the higher the hurdle that we set. We're obviously not going to always be right with our expectations for a company but certainly we're not going to invest in a company if we don't see a 30%-plus type of IRR potential.

So we're pleased that we're able to demonstrate this quarter and what we demonstrated last quarter shows those types of returns. The Twitter position we liquidated publicly also had north of that 30% hurdle. So we're working hard to generate the returns that one would expect from a portfolio and we believe that that will ultimately translate into how investors look at the stock and how the stock can ultimately perform.

I hope that answered your question. Thank you.

Blake Harper, Wunderlich Securities.

Yes, thanks. The first one for Bill, is there any deadline that you have as far as being taxed as a C corporation that you would have to pay that or can you just delay that indefinitely until you get clarification there on the RIC status?

As far as paying taxes we wouldn't have had to pay any taxes as a result. So it's not like we owe the IRS any money as a result of us filing as a RIC. Clearly we would love to have a decision sooner rather than later for purposes across the board in terms of capital deployment and such.

So obviously we're eager to get into some type of correspondence with the SEC to hopefully get this 851(e) application resolved in the foreseeable future. But just to be clear we did not owe taxes in the tax year. But just to be clear, too, we have accrued for taxes for our unrealized gains.

So we are continuing to accrue. That's baked into the NAV. However, as far as paying actual cash taxes we do not owe any taxes to the IRS.

Ed Woo, Ascendiant Capital.

Yes, thanks for taking my question. Michael, what are you seeing out there in Silicon Valley? Have you seen any major changes in themes or valuations under underinvestment objectives?

Yes, I mean I think there's a continuation of innovation and growth that I think is really exciting. I think when you look at some of the new waves that I think are getting attention and I think are exciting include virtual reality. Virtual reality has been something people have been talking about for 20 years but the technology is now finally here where I think you're going to see commercialization and some really exciting opportunities from that.

Robotics has been an area that has showed some real momentum and I think Google made something like six acquisitions of robotics companies last year. But I think you're starting to see just really interesting technologies being developed around that and of course that goes into the driverless cars and the drones and so forth.

So I think that whole area is relatively new in getting more and more attention. I think we're just on the forefront of some areas that we've been involved with. Big data and data science it is incredible to me to see the activity that's going on in the businesses that are being created.

Business analytics and data analytics of course has been around for some time. But you're seeing Moore's Law continue to impact the power of software and the ability for data scientists to create gigantic solutions and ROI for businesses, and the security issues and everything else.

I think data science you're going to see some really important companies be developed from. So I think those would be a couple of observations.

Hannah Kim, JMP Securities.

Hi, thanks for taking my questions. I'm calling in for Chris York.

I just wanted to touch on the recent financing Lyft received and according to Wall Street Journal I think the new investors are value Lyft at a much higher valuation right now. I think it's valued at more than $2.5 billion.

I just wanted to have a better understanding of how would this impact your mark for the preferred equity investment in your portfolio for Q1? Will it be fully reflected or will there be some sort of discount that you will be using?

Hannah, just to be clear you're talking about Lyft, is that --

Yes. Lyft.

And we want to be both accurate in terms of how we answer that as well as not disclose something that we're not allowed to disclose. I think it's fair to say I mean the reporting that's been done in The Wall Street Journal about the Lyft valuation, one thing I think it's okay to confirm that it's up nicely from where we made our investment a year ago.

It won't be -- but that investment will not be reflected as of December 31. It's not in the current numbers. That will be reflected in the March 31 numbers.

So Lyft is a company that has got great momentum. And we think you should expect that there will be a value increase in how we carry our Lyft investment on our books.

Jon Hickman, Ladenburg.

Hi, Mike, I want to go back to the unicorns. Can you talk about the market that's developing for people for those unicorn companies that are not public but there's obviously transactions going on because you were able to sell your position in Palantir, etc.

So where's that coming from? Can you talk about who the buyers are?

Yes, I think it's something that we have fully expected and frankly I would expect I would have expected it to happen faster than it has just because there's sort of an obvious opportunity that if you're a growth investor and historically you were a public growth investor if you wanted to participate in that activity you've got to figure a way to do it privately. I think what a lot of public investors have found it's a lot more difficult to do than just buying private shares. But I think they also the reality is the opportunity is such that more and more are trying to find ways to get involved.

Certainly as you have more larger companies with more stock available it makes it that much more realistic for institutional investors to participate. And so you're seeing a variety of hedge funds and mutual funds and family offices that are increasingly putting their toe in the water is the way I'd say it.

And again for us we think that that's great because it just gives us more options for selling securities if we thought it was in our best interest. And from a sourcing standpoint, frankly our sourcing is coming much more directly from existing employees, early shareholders and so forth and not so much in the marketplaces where the institutional investors are starting to experiment if you will.

But the market is evolving. I think it's again I think it's a positive thing for us.

I think it's a positive thing for the private company ecosystem. And it's a natural result of the fact that it's just not as attractive to be a public company today as it once was. And so if there's other options you're going to see private companies just continue to stay private until it just becomes sort of inevitable.

At this time there are no further questions over the phone lines. I would now like to turn the conference back to management for any additional or closing remarks.

The only additional comment I'll provide is that we are very excited about what's going on at GSV Capital and what's going on with our portfolio companies. We are going to continue to work really hard for our shareholders to deliver value which is going to be driven by the returns on investments we're making.

So we'll look forward to having any follow-up questions and continue to be very, very active in terms of finding ways to optimize our portfolio. So thank you very much for your interest and support and we look forward to following up with you in the future.

This now concludes the presentation. Thank you for your participation.