Table of Contents
- 1 Past Bright Spots
- 2 Past Analyses and Efforts to Fix SVVC
- 3 Past Harbingers: Anti-Activism
- 4 PHUN Did not Live Up to Its Name
- 5 The ASX Was a Runway to Two Crash Landings
- 6 SVVC’s Fees and Asset Performance are Big Problems
- 7 SVVC’s Governance: Hope or Hopeless?
- 8 The Promising Activism-Related Events of 2020
- 9 The Potential for Future Activism
- 10 Conclusions
Firsthand Technology Value Fund (SVVC) is a BDC focused on venture capital. Readers with limited familiarity with BDCs should read my recent article that serves as a primer on BDCs as well as warnings about their fees, conflicts of interest and potentially poor governance.
SVVC has been trading recently around $4 per share despite the Company’s estimate that its NAV is well over three times that amount. The next few sections briefly describe the path that eventually led to SVVC’s dismal state.
Past Bright Spots
On July 17, 2014 SVVC reported an NAV of $27.30 per share and disclosed that its top two holdings were Twitter and Facebook! But the early bright spots soon began to be overshadowed by the poor performance of other portfolio companies.
Nevertheless, on 10/19/18 SVVC announced a “Preliminary NAV of $29.18 Per Share as of September 30, 2018″ and that “Holdings Include Pivotal, Revasum, IntraOp, Roku, and QMAT.” SVVC estimated that “the Fund’s top five holdings constituted 92.4% of the Fund’s preliminary net assets, and 79.4% of our preliminary gross assets.”
Interestingly, three of these top five investments (Pivotal, Revasum and Roku) were market-traded, meaning that the NAV was presumably dominated by “real” market values rather than subjective appraisals. These were indications that the goal of venture capital (attractive exits such as IPOs) was being realized, albeit with returns that were modest compared to returns available in listed equity markets.
In the same 2018 press announcement SVVC added: “On August 31, 2018, the Fund announced a plan to repurchase up to $2 million worth of SVVC stock in the open market by March 31, 2019.”
Repurchasing their stock seemed to indicate that the management was willing to lower its management fees (by collecting 2% on a smaller amount) in order to help out shareholders by repurchasing stock at a huge discount to NAV. Wow! Huge discounts based on mostly market-based asset values and a management team that care about its stockholders? Despite the announcement SVVC closed October 2018 at only $13.50. Apparently the market was concerned as indicated by its 50% discount.
Past Analyses and Efforts to Fix SVVC
The strong case for SVVC in early 2019 is well described in a previous article in Seeking Alpha by Bobby Geiger. Unfortunately, his analysis overestimated the possibility that SVVC’s portfolio companies were well chosen and underestimated the potential problems of entrenched managers who apparently wish to keep their well-compensated jobs alive.
The Fund’s manager (Firsthand) has a long history of overseeing funds with poor long-term performance caused by consistently poor investment decisions. Other than SVVC, Firsthand’s only two remaining funds appear to be (ALTEX) and (TEFQX). ALTEX has posted a -1.84% annualized total return since-inception v. an S&P 500 return of 7.93% [see “Data Sheet” on linked page]. TEFQX has posted a 4.52% annualized total return since inception (9/30/99) v. an S&P 500 return of 6.38% and a NASDAQ Composite Index return of 7.50%.
The five most recent Seeking Alpha articles on SVVC have all been bullish. Those articles tend to make a case for SVVC based on the past. One contributor, Steve Harris, speculated that threats of activism would lead to market performance after SVVC’s CEO, Kevin Landis, fended off activist efforts: “After his recent near-death escape from the jaws of defeat, it is likely that Mr. Landis will take immediate measures to address the fund’s deep discount to net asset value before the sharks attack again.”
And that raises the key issue: Will activists or anyone else be able to reverse the sad history of SVVC: bad investment decisions, high expense ratios, huge discounts, poor returns and a fund manager that seems to oppose rational pathways out of this fee trap. It is conceivably reasonable for venture capital funds with limited terms so have a 2%/20% fee arrangement. But for a fund like SVVC with a perpetual fund structure, modest investment returns mean terrible post-expense returns for shareholders.
Jeffrey Jakubiak laid out the activist argument cogently in Seeking Alpha in 2017 “Current management have destroyed shareholder value through poor performance and excessive fees resulting in a large discount to NAV. ” Unfortunately, no long-term solutions resulted.
Past Harbingers: Anti-Activism
Why hasn’t something been done to fix this mess? Well, so far SVVC has managed to fend off activists. For example, in May of 2014, a few months before the July 2014 announcement of an NAV of $27.30 per share and that its top two holdings were Twitter and Facebook, SVVC announced a deal with an activist investor. The activist apparently agreed to “…vote its shares in accordance with the Board’s recommendations“.
Digging deeply into SVVC’s past indicates to me a pattern of trading at huge discounts to NAV and occasionally repurchasing shares and/or distributing cash to defuse efforts by activists to enact changes. The long-term effect has been that the best performing and most liquid assets get liquidated while the losers are retained as they decline in value or disappear altogether.
Recently SVVC announced that “…as of August 31, 2020, the estimated total investments of the Fund were approximately $94 million, or $13.70 per share” and that its top five holdings were: Pivotal Systems, IntraOp Medical, Wrightspeed, Revasum, and SVXR.
The two crucial questions are: 1. Are the assets really worth close to $13.70 per share, and 2. Will management allow whatever value there really is to benefit shareholders or themselves?
Note that only one of the top three holdings is market-traded. Especially troubling is that its fourth biggest holding, Revasum (also market traded) includes this in its recent financial statement (8/31/2020) that there is: “…material uncertainty that may cast significant doubt about the Group’s ability to continue as a going concern…”.
PHUN Did not Live Up to Its Name
One of the most bizarre episodes in the SVVC saga was the fund’s investment in Phunware (PHUN) which used the innovative exit strategy of SPACs. Despite having a history of losses, few revenues, and some apparently specious claims as to where and when profitability would come, the stock flew upward (based on incredibly low volume) from $10 per share to over $500 per share in five weeks and then plunged to less than $1 per share several months later.
There were comments about cryptocurrencies and widespread use of the firm’s software, but at the time I could find no fundamentally-sound reason for any such price movements and still do not know what was causing the volatility and who benefited. At some point SVVC liquidated its position, likely at a loss.
The ASX Was a Runway to Two Crash Landings
Prior to the disastrous SPAC exit with PHUN, SVVC used the Australian Stock Exchange [the ASX] as a runway for two of its highly touted ventures: Pivotal Systems and, later, Revasum. IPOs of small U.S. technology firms via the ASX has been touted as an attractive exit strategy. SVVCs two ventures lacked actual profitability, but there was no lack of enthusiasm for their potential (and expected?) profitability in the near futures.
Both Pivotal Systems (ASX:PVS) and Revasum (ASX:RVC) began their trading on the ASX at valuations that led to immediate and large gains in SVVCs net asset value (and of course big fee increases for SVVC’s manager). But the last two years (during which there have been tremendous tech gains in the U.S. market) the ASX has been especially unkind to SVVCs two ASX-traded tech firms. The very poor performance of Pivotal and Revasum was blamed on very weak electronic chip markets (both firms offer technology for manufacturing, controlling and/or monitoring chips). Both firms have expressed optimism based on their claims of superior technology and potentially expanding revenues. About the only tangible “success” that I have noticed is that Pivotal has been able to borrow money to keep afloat.
SVVC’s Fees and Asset Performance are Big Problems
SVVC collects management fees a of 2% per year and incentive fees on profit. The 2% is levied based on the fund’s reported book values for its assets. When the fund trades at a 2/3rds discount (which it often does), the management fees on the market’s assessment of the fund’s actual value are 6% per year (not counting the fund’s non-fee expenses). When total expenses are considered, it is clear that the fund’s equilibrium share price should be at an enormous discount unless the fund’s investments are generating substantial gains. However, SVVC’s consistently poor asset returns have occurred during one of the greatest bull markets in history for tech firms. In theory, the market is saying that 2/3rds of the value of the firm’s assets are expected to be eaten up by fund expenses.
SVVC’s Governance: Hope or Hopeless?
In late 2019 SVVC’s management apparently began to feel pressure from activists. The Fund announced a $4 million share repurchase with half of the tender reflecting repurchasing of shares by the fund and the other half purchases by Firthand’s CEO, Kevin Landis. The announcement appeared to buttress SVVC’s share price and the final price of the tender was $7. Unfortunately, and perhaps substantially due to the pandemic, the shares plummeted to an all-time low of $2.72. As of October 2020 SVVC is trading near $4 – indicating that SVVC is not sharing in the general equity market recovery and that serious troubles and expenses remain in the fund’s future.
The Promising Activism-Related Events of 2020
I made a proposal at the 2020 SVVC annual shareholders meeting that was eventually held virtually on July 2,2020. That proposal (Proposal #3) read in part:
“RESOLVED: That the shareholders … hereby request the Board of Directors of SVVC seek and pursue any and all measures to enhance shareholder value including: (1) orderly termination of the fund, (2) orderly liquidation of SVVC assets with distribution of available cash to shareholders, (3) tender offers for SVVC shares using available cash from any and all investment exits, (4) merger of the fund into an entity offering shareholder exits near NAV (net asset value), or (5) other measures likely to allow shareholders to exit SVVC near its NAV.“
The proposal needed to be “non-binding” in order to avoid potential legal challenges. Sadly, the proposal was unanimously opposed by SVVC’s Directors as reported on pages 17-18 of the Fund proxy statement:
“The Board of Directors of the company, including all of the independent directors, unanimously recommends that you vote “against” the non-binding stockholder proposal.”
Nevertheless the proposal passed with well over a 2-1 ratio of “For” votes over “Against” votes. If, for the sake of argument, Landis’s 660,445 shares are deducted from the “Against” vote (under the assumption that he voted in accord with his opposition to the proposal stated via the unanimous Board vote cited above), the ratio of remaining shares voting “For” rather than “Against” would indicate an astounding 10-1 vote urging termination or liquidation of the fund.
Another fascinating result of the July 2020 shareholders meeting is that one of the independent Board of Directors, Kimun Lee, apparently lost his re-election bid as reported in a revised tabulation of the election results:
The election results contradict an earlier announcement (at the meeting and as indicated by first set of tabulations in a subsequent SEC filing) that he had been re-elected.
The Potential for Future Activism
The voting at the 2020 annual shareholder’s meeting indicated that the potential to terminate the endless fees and finally return capital to SVVC’s owners may be at hand. The proposal to terminate the fund on an orderly basis was well received by shareholders, but it was non-binding on the Directors who had already voted their unanimous opposition as reported in their proxy statement on page 18. If the Fund does not promptly take full and prompt measures to put this termination into effect I see no viable pathway for shareholders other than to engage in further activism.
A bright and successful activist one told me “Always leave the fund manager with a way out”. That approach works well for short-sighted activists dealing with funds that have moderate fees and returns. But after numerous attempts to mend SVVC it is time to end SVVC and its deleterious fees.
For disclosure purposes: I have been in occasional and cordial contact with one representative of Firsthand and I have been available to various media regarding my efforts to salvage value from SVVC before the poor decisions and the fees eat away everything.
I will end with some fabulous excerpts from the movie “Other People’s Money” in which activist “Larry the Liquidator” appeals to a firm’s long-suffering shareholders:
“For the last ten years this company bled your money… Who cares? I’ll tell ya: Me. I’m not your best friend. I’m your only friend…”
“This company is dead. I didn’t kill it… Let’s have the intelligence, let’s have the decency to sign the death certificate, collect the insurance, and invest in something with a future… You know why, fellow stockholders? Because at my funeral, you’ll leave with a smile on your face and a few bucks in your pocket. Now that’s a funeral worth having!
To review my explanation of the need for Proposal #3 at the 2020 shareholders meeting, it may be helpful to visit the Fund’s proxy statement for the 2020 annual shareholders meeting on pages 16-17.
Also, please feel free to contact me if you are a shareholder ready to support change or if you know of another BDC or other firm in a similar situation.
- SVVC is unlikely to create value through superior investment management
- SVVC’s enormous fees and expenses relative to its market value are destroying shareholder wealth
- The only way out for shareholders is to support shareholder activism that seeks to create long-term benefit for all shareholders
Disclosure: I am/we are long SVVC.
Additional disclosure: In addition to my personal holdings of SVVC, I am a part-time employee of Biltmore Capital Advisors that also has long positions in SVVC for some clients.