In a sure sign that the U.S. eocnomy has finally broken free from the lingering effects of the Great Recession, the IPO market is scorching hot. The dollar value of U.S. IPOs in 2013 jumped 40% to $59 billion, according to Thomson Reuters.
Thus far in 2014, the action is showing no sign of letting up. As IPO tracker Renaissance Capital notes: "The US IPO market showed more activity than any other first quarter (of 2014) since 2000 as 64 companies raised $10.6 billion. That is more than double the number of IPOs in the first quarter of 2013, a year that also had the most public offerings in over a decade."
Analysts at PricewaterhouseCoopers figure that deal-making actually exceeded $11 billion in the quarter. For any investment firms that make multiple investments in private firms, this is great news. The ability to monetize their investments is made a lot easier when bankers are circling to do deals. Investors can get in on the trend by investing in three pre-IPO specialists.
|1. Harris & Harris (Nasdaq: TINY)|
|With roots extending back to 1981, this firm has made many investments in technology companeis that have cultivated a clear edge in their fields. Electronics (40% of the portfolio), clean energy (45%) and health care (15%) are the areas of expertise. Each year, Harris & Harris harvests profits from its investments (either though an IPO or the sale of its stake to another firm), and re-deploys proceeds back into new investments. |
Unlike a traditional business development company (BDC), TINY doesn't pay dividends, so investors can benefit only from an increase in the net asset value (NAV) of the portfolio. The current NAV stands at $3.93 a share, meaning investors can own this portfolio at a current 7% discount to NAV.
And this NAV appears poised to rise as 10 holdings in the portfolio are characterized as late-stage, meaning they may be sold off this year. Most of the time, TINY is able to sell its stake for a price above the carrying value on the books. Ascendiant Capital estimates that a series of transactions should push the NAV up to $4.43 a share by the end of 2015. Shares currently trade at an 18% discount to that target. (If you live near New York City, Harris & Harris will be providing a glimpse of its portfolio holdings at the end of this month.)
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|2. Keating Capital (Nasdaq: KIPO)|
|This investment firm has a clear focus on technology, with stakes in Internet, software, hardware and clean-energy firms. This firm's track record is much shorter than Harris & Harris': It didn't make its first investment until 2010 and didn't go public itself until the end of 2011. In that time, the company has invested more than $60 million in roughly a dozen tech firms. |
The limited operating history and small portfolio may explain why shares trade at a hefty 20% disocunt to NAV of $7.65 a share. That's like buying a portfolio for 80 cents on the dollar. Moreover, a series of expected IPOs for some of the holdings leads Ascendiant Capital to anticpate a rise in the NAV to $8.80 a share by the end of 2015. Trading at around $6 right now, that makes shares quite a bargain.
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|3. GSV Capital (Nasdaq: GSVC)|
|This investment firm is best aligned with the current trends in the IPO market, with a major focus on social media, e-commerce, cloud computing and education technology. Pre-IPO investments in Facebook (Nasdaq: FB) and Twitter (NYSE: TWTR) pushed this stock to$20 back in 2012, and shares were valued at a 40% premium to NAV. That couldn't last, and shares evenutally moved below $15 and toward NAV. |
In recent weeks, shares have taken a fresh tumble, to just $10, as concerns have grown that the frothiest social media and dot-com stocks are headed for a pullback. Yet in the case of GSV Capital, the sell-off appears to be overdone, as shares now trade at 30% discount to NAV of $14.91. Moreover, a series of expected IPOs for portfolio holdings may boost NAV to $16.74 a share by the end of next year, according to analysts at MLV Capital. Part of the NAV boost is expected to come from an imminent IPO for cloud hosting firm Dropbox.
Risks to Consider: If the white-hot IPO market slams shut, or if tech valuations head south, then these firms may have a hard time harvesting their investments at profitable prices.
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Action to Take --> All three of these venture capital firms trade at solid discounts to NAV. Of the three, GSV Capital may have the greatest appeal, both because of the NAV gap and the firm's on-the-mark portfolio positioning. As these firms bring more portfolio holdings to the IPO gate, shares should start to close the gap to NAV.