When, oh when, will Twitter Inc. go public, letting ordinary investors in on one of the dominant platforms in social media?
It's an excellent question. Then again, if you're itching for a piece of the action, there's no need to wait. A little-known vehicle trading on the Nasdaq exchange in the United States already allows investors direct, albeit diluted, exposure to Twitter's privately held shares.
GSV Capital Corp. - the "GSV" is for "Global Silicon Valley" - is a closed-end fund launched in early 2011 with the mission of providing its investors with a piece of the tech action. It's raised $245-million (U.S.) in a series of public financings and has steadily deployed its capital, making roughly a dozen or more investments in privately held tech companies each year. Today, it has 45 companies in its portfolio.
Early on, investor enthusiasm about the concept drove the shares to trade at a significant premium to what's called net asset value, or NAV, the value of the fund's holdings minus any liabilities. At one point in the third quarter of 2011, GSV shares fetched 51 per cent more than their NAV.
The company delivered on its promise by holding shares of three significant tech names that ultimately went public. Unfortunately, those names were Groupon, Zynga and Facebook, all of which ultimately sank below not only their IPO price, but what GSV paid for the shares when they were private companies.
As a result, investors soured on the shares, and they sank from a high above $20 to a low below $7 late last year. The premium turned to a deep discount of nearly 50 per cent to NAV.
Facebook's recent rebound means the fire-sale days are over, with GSV shares closing at $12.81 Wednesday, about even with its NAV of $12.87 at the end of the quarter. It's up nearly 60 per cent in the last month.
And yet, the analysts who follow the company note GSV's NAV fails to reflect some of its most recent investment gains - suggesting the share price may continue to climb.
GSV marks its Facebook stake at $24.88 per share, but it sold 175,000 shares, half its stake, at an average price of $29 in July, and held the rest as Facebook stock zoomed above $38 in recent trades. (I own 100 shares of Facebook, but if you read this column regularly, you probably knew that.)
Another GSV investment that has gone public, Silver Springs Networks, listed on GSV's books at $23.19 per share, traded above $31 this month before retreating below GSV's book price (and cost). And Control4 Corp., which debuted on the Nasdaq earlier this month, trades for double the price it's listed at on GSV's books.
Analyst Jon Hickman of Ladenburg Thalmann, who has a "buy" rating and $16.50 target price, estimates the gains on Control4 cover nearly all of the company's past losses.
Still, the big prize is Twitter, GSV's largest holding. Presumably using valuations from Twitter's recent rounds of financing, GSV estimates its stake is worth more than $37-million, roughly 15 per cent of the fund and nearly as big as the next two holdings combined. (No. 2 is Palantir Technologies, the cybersecurity firm whose founder just landed on the cover of Forbes magazine.)
Is GSV a slam dunk? By no means. One of the recent phenomena in tech investing is that companies are going public later in their life cycles, meaning there are more rounds of private financing - and private investors, not public shareholders, are capturing early gains. Four of the five GSV holdings that went public have traded in the public markets for less than what GSV paid.
GSV has also had to write off a number of investments entirely, as the companies have already failed. Such is life in the tech space.
And, of course, GSV's executives, a collection of tech veterans, aren't doing the job for free. They collect a 2 per cent annual management fee, plus 20 per cent of the gains in each investment above an annual threshold of 8 per cent. Those are hedge-fund type fees for a public investment vehicle.
So, consider yourself warned. However, if GSV's estimate of its Twitter holdings is appropriate, you're getting $2 of Twitter stock for every share of the closed-end fund you buy right now. If you want a piece of the Twitter action before the company even acknowledges it's going public, the folks at GSV have some shares to sell you.
GSV Capital (GSVC)
Close: $12.81 (U.S.), up $1.02
© 2007 The Globe and Mail. All rights reserved.
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