GSV Capital (GSVC) is a stock that made headlines this past June when it bought a stake in Facebook that valued all of Facebook at $70 billion. For reference, Microsoft bought a stake back in October 2007 at a price that valued Facebook at $15 billion and Goldman Sachs invested (with clients) in January or so of this year at a valuation of $50 billion. GSV stock spiked up on the news up to over $19/share which was over 1.4x net asset value (NAV) per share.
The total portfolio value of GSVC was around $45 million and the Facebook investment (225,000 shares at $29.28 in the private market) was $6.6 million, so Facebook accounted for 14.7% of the GSVC's portfolio. At $19.50, the market cap of GSVC was $64 million, $19 million more than NAV. The market was essentially discounting an immediate quadrupling of the Facebook position; that would value all of Facebook at $280 billion!
The stock has come down now to $13.92/share versus a net asset value per share of $13.47, a very slight premium.
Is GSVC a good way to play Facebook?
First of all is the question whether you would want to 'play' Facebook. Even at GSVC's entry price, Facebook is valued at $70 billion. Even if it does as well as Google going forward, that would be a market cap of $200 billion, a triple.
Holding all else in the portfolio equal, a tripling of GSVC's stake in Facebook would lead to a net asset value of $58.2 million, or a 30% gain in the NAV of GSVC. This is certainly not bad, but again, we are talking about Facebook doing just as well as Google and that's not a sure thing.
Also, venture funds tend to hit some homeruns, but many investments go to zero. We really have no idea how the other 85% of the portfolio will perform.
In any case, let's take a quick look at this thing:
GSV Capital is a new BDC (business development company) that was IPO'ed early this year at $15/share. It was set up by Micheal T. Moe, founder of ThinkEquity Partners. He used to work at Montgomery Securities and Merrill Lynch (head of Growth Equity Research or something like that), and he is the author of the book, "Finding the Next Starbucks" (I have not read this book). As far as credentials goes, he looks fine.
But I have never really been a growth stock investor so I really have no idea about his reputation or past performance in other situations where he may have managed money directly.
GSVC intends to focus on private secondary markets like SecondMarket, SharesPost to buy their investments.
On September 27, they priced a follow on offering of 1.9 million shares at $14.15. Adjusted net asset value after the offering is $70.5 million and net asset value per share is $13.47/share. So this offering does somewhat dilute the Facebook exposure unless they buy more Facebook shares in the private secondary market.
Other than Facebook, they do have a $2 million stake in Groupon and a $6.9 million stake in Twitter, both of which are seen to be potentially 'hot' IPOs.
GSVC is managed by a separate investment company, GSV Asset Management that does charge the standard 2% management fee and 20% incentive fee. Total expenses so far as percentage of net assets is around 5%, which is very high. I don't know how much the secondary offering will reduce that (as some are fixed costs specific to GSVC).
Officers and Directors own a 3.3% stake, but that is not surprising as Moe expects to earn money from the management and incentive fees that will be paid to his GSV Asset Management.
So what to think of this thing? I am not a big fan of venture capital and high priced technology stocks/investments. But for people who really want to be exposed to that sort of thing, this may not be a bad vehicle to keep an eye on.
One other thing to keep in mind is that the existence of this private secondary market will certainly dampen any impact a future IPO may have as prices are ratchetted up in a quasi-public market; this didn't used to happen. Therefore, prices paid by GSVC will most likely be much, much higher than what typical venture capital investors pay when they get in on the ground floor. This will certainly dampen potential returns for GSVC.
The other thing is that although GSVC can make tons of money if we get a nice bubble going and a strong IPO and post-IPO market, that sort of seems almost like a necessity for GSVC to make any money. That is not the sort of situation that I would want to be in myself.
Also, I would be careful not to put too much emphasis on Facebook, Twitter and Groupon as bad investments in other areas can easily offset any big gains achieved in the above three 'hot' companies (assuming they have successful IPOs and the stocks fly).
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