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Edited Transcript of GSVC earnings conference call or presentation 11-Mar-20 9:00pm GMT

Q4 2019 Sutter Rock Capital Corp Earnings Call

WOODSIDE Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Sutter Rock Capital Corp earnings conference call or presentation Wednesday, March 11, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allison Green

Sutter Rock Capital Corp. - CFO, Treasurer, Chief Compliance Officer & Secretary

* Jackson Stone

Sutter Rock Capital Corp. - Investment Associate

* Mark David Klein

Sutter Rock Capital Corp. - President, CEO & Director

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Conference Call Participants

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* Mark Anthony Palmer

BTIG, LLC, Research Division - MD & Financials Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Sutter Rock Capital's Fourth Quarter 2019 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jackson Stone. Please go ahead.

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Jackson Stone, Sutter Rock Capital Corp. - Investment Associate [2]

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Thank you for joining us on today's call. I'm joined today by the Chief Executive Officer of Sutter Rock Capital, Mark Klein; and Chief Financial Officer, Allison Green.

Please note that a slide presentation that corresponds to today's prepared remarks by management is available on our website at www.sutterrock.com under Investor Relations, Events & Presentations.

Today's call is being recorded and broadcast live on our website, www.sutterrock.com. Replay information is included in our press release issued yesterday. This call is the property of Sutter Rock Capital and the unauthorized reproduction of this call in any form is strictly prohibited.

I would also like to call your attention to customary disclosures in yesterday's earnings press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition.

These statements are not guarantees of our future performance or future financial condition or results and involve a number of risks, estimates and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including, but not limited to, those described from time to time in the company's filings with the SEC.

Management does not undertake to update such forward-looking statements unless required to do so by law. To obtain copies of Sutter Rock Capital's latest SEC filings, please visit our website at www.sutterrock.com or the SEC's website at sec.gov.

Now I'd like to turn the call over to Mark Klein.

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Mark David Klein, Sutter Rock Capital Corp. - President, CEO & Director [3]

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Thank you, Jackson. We are pleased to share the results of Sutter Rock Capital's fourth quarter 2019. First, I will review the recent quarter and provide an update on key initiatives we are executing to enhance shareholder value. Then I will present an overview of key developments in the portfolio. To conclude, I will hand the call over to Allison Green for a brief financial overview. At the conclusion of our remarks, we will open the call up for questions.

Let's start with Slide 3. At December 31, 2019, net asset value was $11.38 per share, an increase from $11.24 per share at September 30, 2019, and an increase from $9.89 per share at December 31, 2018.

Net asset value totaled approximately $200 million at year-end, inclusive of dividends totaling $0.32 per share declared during the fourth quarter compared to $214 million at September 30.

As we have stated before, we believe the strong growth of our portfolio of companies have been exhibiting will continue to drive NAV as we continue to be optimistic about the future of our portfolio.

Please turn to Slides 4 and 5. In our ongoing efforts to drive shareholder value, our Board of Directors concluded that, given the recent market-wide sell-off and the significant discount at which our stock is trading to authorize a $5 million increase to our share repurchase program. This brings the total dollar amount allocated to share repurchases to $40 million inclusive of the $10 million modified Dutch tender offer that Sutter Rock Capital commenced in the fourth quarter.

We've continued to buy back stock in the recent market sell-off, and as of today, we have repurchased approximately $31.5 million of our common stock between the share repurchase program and the tender offer. Later in the call, Allison will provide additional details on the current status of the share repurchase program and the results of the Q4 tender offer.

Furthermore, as previously announced, on November 5, 2019, Sutter Rock Capital's Board of Directors declared a $0.20 per share dividend followed by a $0.12 per share dividend declared on December 20, 2019. These dividends were driven by monetizations in Sutter Rock Capital's public and private securities. These shareholder initiatives come in addition to our internalization at this time last year.

As announced during our call on March 14, 2019, Sutter Rock Capital transitioned to an internally managed fund structure. As we have now completed 3 quarters as an internally managed BDC, the cost savings from our operations are reflected in our income statement.

Please turn to Slides 6 and 7 for a review of notable developments in our investment portfolio in the fourth quarter and subsequent to year-end. Sutter Rock Capital's top 5 positions as of December 31 were Coursera, Palantir, Course Hero, OZY Media and Nextdoor, excluding Sutter Rock now exited investment in Parchment. These positions accounted for approximately 61% of the investment portfolio at fair value.

As of December 31, our top 10 positions, excluding Parchment, accounted for approximately 83% of our portfolio. As previously announced, our largest position, Coursera, raised $103 million in April 2019 at a $1.56 billion pre-money valuation according to PitchBook. Coursera's learning platform currently serves 48 million learners, 2,200 businesses and over 150 top universities.

Our second largest position, Palantir, is a leading data analytics company that continues to show positive momentum. We currently hold our Palantir position at an implied equity value of approximately $12 billion. Our third largest position, Course Hero led by CEO Andrew Grauer, recently raised the Series B financing round. Per an EdSurge report in February, Course Hero raised a $10 million Series B round, led by NewView Capital at a $1.1 billion valuation. NewView Capital also contributed $30 million to the company's employee tender program. This financing round marks Course Hero's first financing since Sutter Rock led its Series A in 2014.

Course Hero has turned to profit since 2012 and surpassed $100 million in revenue last year. Course Hero continues to execute against its growth strategy, offering 30 million course-specific resources for the 20 million plus students and educators on its platform.

Our fourth largest position, OZY Media, is a media and entertainment business focusing -- focused on serving adult -- young adults. As discussed on the November 2019 Q3 earnings call, OZY Media raised a $35 million Series C round led by Marc Lasry with participation from investors including InterLock Partners, LionTree, Atinum Investment, Axel Springer and Emerson Collective.

As reported by Axios, OZY's top line has grown approximately 50% year-over-year for the past 4 years and the company expects to be profitable in calendar year 2020.

Our fifth largest position at year-end, excluding Parchment, was Nextdoor. Nextdoor is an outstanding platform that serves over 210,000 neighborhoods across 11 countries. We believe Nextdoor has tremendous upside, both with an ability to expand internationally and with an opportunity to further monetize its hyper-localized user base.

As previously announced, subject to year-end, we successfully exited our Parchment position for a sizable gain following the completion of Parchment's merger with Credentials Solutions. To put our investment portfolio into perspective, the combined fair value of our top 5 positions as of December 31, excluding Parchment, was $117 million or approximately 102% of Sutter Rock's market capitalization at year-end. We believe this dynamic emphasizes a significant risk-reward opportunity for our investors.

Segmented by 6 general investment themes, the top allocation of our investment portfolio is Education Technology, representing approximately 43% of the investment portfolio at fair value. Big Data & Cloud was the second largest category, representing approximately 17% of the portfolio.

Our Financial Technology and services category accounted for approximately 14% of our portfolio at fair value, as did our Social & Mobile category, while Marketplaces accounted for approximately 12% of our investment portfolio at fair value.

I'd like to briefly touch on the coronavirus. The outbreak has had a severe negative impact on many families as well as the financial markets, but we believe our portfolio is well positioned to manage the effects of the coronavirus.

As the coronavirus has forced closings of schools and universities around the country, it has shed a light on value of online learning. We believe the online courses of Coursera, our largest position, are particularly well positioned during this time as well as the long term as this trend of distance learning continues. Similarly, with less student access to teachers or study groups, Course Hero will be able to support students with online learning supplements.

Additionally, Lime represents a viable transportation alternative with its bikes and scooters as individuals seek to avoid mass transportation and other ride-sharing options. We also believe Nextdoor may benefit from an uptick in hyper-local communication as news regarding the coronavirus rapidly evolves and can be delayed by hours or days through local news sources.

Our -- 1 company in our portfolio that could experience some level of dislocation due to the coronavirus is OZY Media. The company's flagship event, OZY Fest, is a highly anticipated and well-attended annual event in New York City. Given other major festivals such as South by Southwest and Coachella have been postponed due to the coronavirus, we would anticipate that OZY Media management is also discussing whether to postpone OZY Fest until later in the year. While we don't believe postponing OZY Fest would have long-term negative implications for the company, it may have a short-term impact on growth.

Please turn to Slide 8. As stated on our previous earnings calls, it is our intention to hold public securities through any required lockup period and the ensuing stabilization period. Accordingly, we sold our entire position in Lyft during the fourth quarter for a substantial gain.

As of year-end, we have sold all our public securities in our portfolio. Given recent volatility in the public markets, we believe our complete exit of our public positions prior to the recent market sell-off, combined with our year-end cash balance and proceeds from the recently closed Parchment merger position us to opportunistically make investment at attractive levels.

On February 28, we announced the appointment of Keri Findley as a Senior Managing Director and Senior Member of the Investment Committee as we prepare to expand our strategy to include credit investments. As a member of the investment committee, Keri will help Sutter Rock find investment opportunities and explore partnerships with other managers by spearheading an investment focus in private credit. Keri is an industry veteran who brings expertise in lending funds to leading venture-backed businesses. Keri was previously a partner at Third Point, an investment adviser founded by Dan Loeb with approximately $15 billion of assets under management, where she focused on distressed investments, including distressed financial securities and mortgage securities.

Prior to Third Point, Keri was employed by D.B. Zwirn and earned a BS in Operations Research from Columbia University. Keri's experience in the private credit industry is unmatched and her addition will be transformative to our fund by introducing a unique investment strategy that will be complementary to our current equity approach.

In addition to providing strategic guidance through our entire investment process from sourcing to acquisition to advising current portfolio companies, Keri will help Sutter Rock Capital initially allocate 20% of our gross assets to credit investments. These loans support businesses' near-term capital needs, particularly for capital-intensive businesses or businesses with meaningful deferred revenue. Asset-backed loans in this space command attractive interest rates, often coupled with the ability to participate in equity upside through warrants assigned to the lender upon funding. We believe this strategy represents compelling opportunity to drive shareholder value as it will generate recurring investment interest income and, over time, to drive a regular dividend stream for our shareholders.

Additionally, this strategy broadens our suite of capital solutions. Beyond the appointment of Keri to our investment committee, our team continues to expand our sourcing network in order to evaluate a wide range of investment opportunities in top VC and institutionally backed companies that demonstrate strong operating fundamentals. We are targeting businesses that have been shown to provide scale valuation growth before a potential IPO or strategic exit.

A few industries of focus include e-commerce and retail, financial technology, food technology and transportation and logistics. Looking ahead, we believe that Sutter Rock is well positioned to deliver long-term shareholder value. We are executing against a disciplined strategy with tailwinds, and we believe fundamentals of our portfolio are strong.

Thank you for your attention. And with that, I will hand it over to Allison.

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Allison Green, Sutter Rock Capital Corp. - CFO, Treasurer, Chief Compliance Officer & Secretary [4]

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Thank you, Mark. I would like to follow Mark's update with a more detailed review of our financial results as of December 31, 2019, and updates regarding recent dividends declared and paid, our share repurchase program, and the modified Dutch Auction tender offer, our transition to an internally managed BDC and other ongoing expense reduction initiatives and our current liquidity position.

We are pleased to report that we ended the fourth quarter in 2019 with an NAV per share of $11.38. A breakdown of NAV per share as of year-end is shown on Slide 9 and is consistent with our financial reporting. In sum, the increase in NAV per share during the fourth quarter was largely driven by approximately $0.43 per share in net realized gain on investments and the net appreciation of $0.36 per share due to the accretive effects of common stock repurchased during the quarter through the share repurchase program and the modified Dutch Auction tender offer.

These increases to NAV per share were offset by $0.32 per share in dividends, resulting from net realized capital gains declared in the fourth quarter, $0.17 per share of net unrealized depreciation of our portfolio investments and a net decrease of [$0.15] per share of net investment loss and decrease to the effect of stock-based compensation on paid-in capital.

During the fourth quarter, Sutter Rock Capital declared a total of $0.32 per share in dividend. On November 5, 2019, our Board of Directors declared a $0.20 per share dividend paid on December 12, 2019 to shareholders of record on December 2, 2019. Additionally, on December 20, 2019, our Board of Directors declared an additional dividend of $0.12 per share paid on January 15, 2020 to shareholders of record on December 31, 2019. The dividends declared and paid have been characterized as net realized capital gains for tax purposes. These realized gains are generally attributable to the monetization of shares held in our portfolio companies that recently went public and other successful developments in our investment portfolio.

Please refer to Slide 5 as I review the current status of the share repurchase program and the final results of the modified Dutch Auction tender offer. During the fourth quarter, the company repurchased 28,000 shares for approximately $169,000. Subsequent to year-end, through March 11, 2020, we repurchased an additional 237,612 shares for approximately $1.5 million. Since inception of the share repurchase program in August 2017 to date, we have repurchased 3,405,096 shares of our common stock for approximately $21.5 million, excluding the modified Dutch Auction tender offer effectuated in the fourth quarter.

As Mark mentioned earlier, we are pleased to announce that our Board of Directors has authorized an additional $5 million allocation to the share repurchase program. This brings the total allocated by our Board of Directors to the share repurchase program to $30 million. Considering share repurchases to date, this leaves approximately $8.5 million for further repurchases under the program.

In addition to the share repurchase program on October 21, 2019, Sutter Rock Capital commenced a modified Dutch Auction tender offer to repurchase up to $10 million of our common stock at a price per share between $6 and $8.

As a result of the tender offer, upon its expiration on November 20, 2019, we repurchased 1,449,275 shares at $6.90 per share, excluding fees and expenses. As of today, between the share repurchase program and the Q4 2019 modified Dutch Auction tender offer, Sutter Rock Capital has repurchased 4,854,371 shares of common stock for approximately $31.5 million, since the inception of the share repurchase program in August 2017. This represents nearly 22% of shares outstanding at that time.

During the fourth quarter, we continued to see the cost-saving effect from the internalization of the management of Sutter Rock Capital. As previously discussed, as an internally managed BDC, we have a significantly reduced cost structure. Upon termination of the investment advisory agreement on March 12, 2019, we no longer pay management fees each month as management is now employed directly by the BDC, and we no longer accrue an incentive fee.

Total operating expenses decreased approximately 28% from $15.1 million in 2018 before fee waivers to $10.9 million in 2019. The decrease was primarily due to the elimination of management fees, incentive fees and costs under the prior administration agreement and further supported by ongoing expense reduction initiatives separate from the inherent savings of the internalized management structure. We anticipate operating expenses to further decrease in 2020 as we will be fully internalized for the entire year and since costs related to the internalization have generally been absorbed in 2019.

Together, we believe our ongoing meticulous efforts to reduce operating expenses and the meaningful cost savings we are realizing as an internally managed BDC will have continued positive impact on NAV. We remain diligent about managing our expense base moving forward.

Finally, I would like to review Sutter Rock Capital's current liquidity. We ended the year with approximately $44.9 million of cash. We did not hold any public securities at year-end. Our cash balance of $44.9 million as of December 31, 2019 consisted primarily of proceeds generated by the monetization of various portfolio position from the fourth quarter of 2017 through year-end and remaining proceeds from the issuance of $40 million of 4.75% convertible senior notes due in 2023 during the first quarter 2018.

Subsequent to year-end, our exit of Parchment Inc. upon the January 31, 2020 closing of their merger with Credentials Solutions resulted in net cash proceeds of approximately $10.8 million and a realized gain of $6.8 million, not including amounts held in escrow.

That concludes my comments. We would like to thank you for your interest and support of Sutter Rock Capital. Now I will turn the call over to the operator to start the Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Mark Palmer with BTIG.

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Mark Anthony Palmer, BTIG, LLC, Research Division - MD & Financials Analyst [2]

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Yes. Just wanted to delve a little bit into the initiative regarding private credit, if you can talk a little bit about what that portfolio, that part of the overall portfolio could look like? Is there going to be any particular industry focus? What are you thinking with regard to diversification, position sizes, things of that nature?

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Mark David Klein, Sutter Rock Capital Corp. - President, CEO & Director [3]

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Sure, Mark, and thank you for the question, and thank you for being on the call. Our general view broadly is to allocate approximately 20% of our gross assets to the strategy, which is about $50 million right now. It is an asset-based strategy, typical off-balance sheet lending secured by hard assets or contracts, done this for quite some time. One of the things we did allude to in our -- in both our press release as well as in my comments is the intent is to lead investments, but be able to do it with other large credit funds that have reached out, that I carry strong relationships with, so that we have the opportunity to have a diversified portfolio of investments as opposed to having only a handful of them. So our bite-size would probably be no more than $10 million any given investment, but more likely closer to $5 million. So that we could have as many as 10 investments in our portfolio under this strategy.

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Mark Anthony Palmer, BTIG, LLC, Research Division - MD & Financials Analyst [4]

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And with regard to the rest of the portfolio, are you -- where you want to be right now in terms of the number of positions that you have? And how are you thinking about that part of the portfolio? As you say, you've got plenty of cash to go out and opportunistically make investments, where do we see things going from there?

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Mark David Klein, Sutter Rock Capital Corp. - President, CEO & Director [5]

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Sure. Great question. So if you sort of do the math of what we put forth in the earnings call, you would see there's about $45 million of cash going into year-end, and obviously, the cash that we got from Parchment. So we do have a fair amount of cash. We continue to actively look at different portfolio opportunities. We feel quite fortunate to have a fair amount of a cash position at this time. We've said for a while that plus or minus 20 names is about the right size for us. We also said any new positions on the equity side would be typically a $10 million investment, it would have to be extraordinary for it to be a $15 million investment. There will be some competition of capital now that we are executing against the strategy would carry and that's sort of where we lie. We are really pretty comfortable with our portfolio. As you can see, the top 5 positions are about 60-some-odd percent of the portfolio, the top 10 are 80-some-odd percent. And our top positions in our portfolio are performing quite admirably.

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Operator [6]

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And at this time, I'm showing no further questions in the queue. (Operator Instructions) Ladies and gentlemen, this concludes today's call. Thank you for your participation, and you may now connect -- disconnect your phone lines.

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Mark David Klein, Sutter Rock Capital Corp. - President, CEO & Director [7]

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Thank you all very much. We greatly appreciate your support. Thank you for taking the time today.