Monday, January 30, 2012

GSVC: Facebook Play Update

Last year I took a quick look at GSV Capital Corp (see here) as it was a play on Facebook. 

Now that the Facebook IPO is right in front of us, I thought I should take a look at this thing again and update some figures. 

Since the end of the September 2011 quarter, GSV Capital (GSVC) added 125,000 shares of Facebook and now own 350,000 shares which constitutes 14.3% of the net asset value (NAV) of GSVC.

GSVC also added 330,000 shares of Twitter for a total of 735,000 shares owned, which is 16.6% of NAV.  GSVC added some other investments, but these are the two that seem to be the most promising from an IPO realization point of view.

Anyway, more details of Facebook will come out soon but for now I googled around and found that it is estimated that around 2.35 billion shares of Facebook is outstanding, and that the recent close of Facebook shares (in the secondary market for private companies) was $34/shares as recently as a week ago.

That gives a valuation of around $80 billion for all of Facebook.  The IPO valuation talk is that Facebook will list at a valuation of around $75-100 billion.

At $34/share, GSVC's holdings in Facebook would be worth $11.9 million, versus GSVC's cost of around $10.5 million.  That's a gain of $1.4 million or $0.25 per GSVC share.  If Facebook was IPO'ed at $34/share and closed unchanged, that means GSVC will get a $0.25 unrealized gain on the Facebook holding, or 1.9% gain in NAV.

Here's the basic info:
  • GSVC NAV:                               $73.2 million   (September 2011 10Q)
  • GSVC NAV/share:                      $13.26    (September 2011 10Q)
  • GSVC shares outstanding:          5.5 million  (September 2011 10Q)
  • Facebook cost basis:                   $10.5 million (January 6, 2012 registation statement)
  • Facebook cost per share:             $30/share (Total cost basis divided by total number of Facebook shares owned by GSVC)

If Facebook was listed at a valuation of $100 billion, or $42.55/share, the gain in NAV/share for GSVC would be 6%. 

The following is a table of what NAV of GSVC would be given various valuation levels of Facebook.  This assumes only the Facebook position and all other holdings unchanged.

GSVC current NAV/share is $13.26/share (as of September-end 2011).

GSVC NAV According to Facebook Valuation:

Facebook                      Facebook                     GSVC                 GSVC
valuation                       Price per share             NAV/share         NAV gain (%)
$75 billion                       $31.90                          $13.38                  +0.9%
$100 billion                     $42.60                          $14.06                  +6.1%
$150 billion                     $63.80                          $15.41                +16.2%
$200 billion                     $85.19                          $16.77                +26.5%

In other words, if Facebook was IPO'ed at $75 billion total valuation and then the stock price stayed there, the NAV/share of GSVC would only increase by about 0.9%.  That's because GSVC has paid around $30/share for their Facebook investments.

If Facebook comes out at the upper end of the range of $100 billion, that would cause a 6% increase in the NAV of GSVC.  If the Facebook IPO came out at $100 billion but then rose sharply after the offering, then the GSVC NAV can go up anywhere from 16% to 27% if the Facebook stock price popped up 50% or doubled (after coming out at $100 billion valuation).

That's not a bad return, of course, on a single event.   (I should also mention that the above analysis doesn't take into account that the management company will take 20% of any gains so are pre-incentive fee figures)

But the problem is that GSVC's stock is already trading at $17.26/share, above even the above aggressive scenario where Facebook goes on to a $200 billion valuation after the IPO.

However, this only looks at Facebook.  The other 'promising' position is Twitter and some of this exuberance may reflect the potential increased valuation of Twitter and potential IPO. 

Groupon (GRPN) is the other promising holding but they had an IPO in November 2011 and the stock price hasn't done too well.  The IPO came off at $20/share, closed the first day at $24.90/share and now trades at $19.90/share.

Looking at the Septembet 2011 10Q, GSVC owned 80,000 shares of Groupon at a cost of $2.1 million, or around $26.25/share. 

If this is correct, it seems that GRPN was IPO'ed at a price *below* what GSVC paid for the shares in the private secondary market.

(None of the above NAV calculations adjusted for GRPN, but it seems like there is not much of a market-to-market gain or loss in percentage terms as a whole)

The GRPN example illustrates what can go wrong with the GSVC strategy.  The private secondary market allows insiders to sell stock in their company to qualified buyers before an IPO, but the prices tend to be very high in this pre-IPO market for big companies close to an IPO.  This really takes the 'pop' or potential huge gains out compared to true venture capital firms that get in on the ground floor. 

This secondary market is far from the ground floor.

In any case, even though the whole world will be looking at Facebook this week and I can't possibly imagine what I can add to it by looking at it myself, I will take a look and possibly post something if I find anything interesting.

Conclusion
Either way, the GSVC stock price at this point at over $17/share seems to more than discount a huge gain in Facebook post IPO.

I should mention that GSVC did file a registration statement in early January to offer up to 3.6 million share (and up to $50 million).  That's a huge offering as GSVC only has 5.5 million shares outstanding currently.

This is usually good news for owners since GSVC seems to be trading at a nice premium to NAV, but one should be aware that such offering would highly dilute the impact of holdings in Facebook and Twitter; they will become a much smaller percentage of the GSVC portfolio.  I suppose that's not a big issue now that Facebook is close to an IPO; people will soon be able to buy it on their own in the public market.

But I would be cautious GSVC going forward as it is highly uncertain whether GSVC will be able to find other investments as promising as Facebook; these tend to be very rare as most venture businesses don't pan out too well.

In any case, if you want to play Facebook with GSVC, it doesn't look like a good idea at this point.   As a long term holding for people interested in post-venture, pre-IPO tech investing, this may be interesting but I will stay away myself.

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