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Edited Transcript of GSVC earnings conference call or presentation 6-Nov-19 10:00pm GMT

Q3 2019 Sutter Rock Capital Corp Earnings Call

WOODSIDE Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Sutter Rock Capital Corp earnings conference call or presentation Wednesday, November 6, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allison Green

Sutter Rock Capital Corp. - CFO, Treasurer, Controller & Secretary

* Claire Councill

* Mark David Klein

Sutter Rock Capital Corp. - President & CEO

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Conference Call Participants

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* Norman Mains

* William Hyler

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to Sutter Rock Capital's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) This call is being recorded today, Wednesday, November 6, 2019.

I will now turn the conference over to Claire Councill, Sutter Rock Capital. Please go ahead.

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Claire Councill, [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 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 earlier today. 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 today'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 sutterrock.com or the SEC's website at sec.gov.

Now I would like to turn the call over to Mark Klein.

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

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Thank you, Claire.

We are pleased to share the results of Sutter Rock's third 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 recent developments in the portfolio. To conclude, I will hand the call over to Allison Green for a brief financial overview, and then we will open the call for questions.

Let's start with Slide 3. At the end of the third quarter, net asset value was $11.24 per share, an increase from $10.75 per share in the second quarter. Net asset value totaled $214 million compared to $211 million in the second quarter. As we have stated before, we believe the strong growth of our portfolio of companies have been exhibiting will continue to drive NAV, and we are as optimistic about the future of our portfolio as we have been in recent memory.

Please turn to Slides 4 and 5. We continue to take initiatives to drive shareholder value. Today, we are pleased to declare a $0.20 per share dividend to shareholders. This dividend is driven by monetizations in Sutter Rock's public and private securities. Based on ongoing portfolio activity and the results of the tender offer, we anticipate declaring an additional de minimis dividend by year-end.

Additionally, on October 21, we commenced a modified Dutch Auction tender offer to purchase up to $10 million in common stock at a price per share between $6 and $8. This expires on November 20. Furthermore, we have repurchased $20 million of shares since we initiated our share repurchase program. Allison will provide additional details on the tender offer as well as an update on the share repurchase program today.

These shareholder initiatives come in addition to our internalization earlier this year. As announced during our call on March 14, Sutter Rock transitioned to an internally managed fund structure. As we have now completed 2 quarters as an internally managed BDC, the cost savings from 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 third quarter and subsequent to quarter's end. Sutter Rock's top 5 positions as of September 30 were Coursera, Palantir, OZY Media, Course Hero and Lyft. These positions accounted for approximately 55% of the investment portfolio at fair value. As of September 30, our top 10 positions accounted for approximately 79% of the portfolio.

Our largest position, Coursera, raised $103 million in April of 2019 at a $1.56 billion pre-money valuation according to PitchBook. Coursera's learning platform currently serves 40 million learners, 1,800 businesses and over 150 top universities.

According to Reuters and CNBC, our second largest position, Palantir, is reportedly seeking funding at a valuation in excess of $26 billion. We currently hold our Palantir position at an implied equity value of approximately $12 billion.

Our third largest position, OZY Media, is a media and entertainment business focusing on serving young adults, whose recent funding we will highlight later in the call.

Our fourth largest position, Course Hero, led by CEO Andrew Grauer, continues to execute against its growth strategy, offering over 30 million course-specific resources for the 20 million-plus students and educators on its platform.

Our fifth largest position at quarter's end was Lyft. Subsequent to quarter's end, we sold our entire position for a sizable gain.

To put our investment portfolio into perspective, the combined fair value of our top 5 positions as of September 30 was $110 million or approximately 93% of Sutter Rock's $119 million total market capitalization at quarter's 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 to Education Technology, representing approximately 36% of the investment portfolio at fair value. Marketplaces was the second largest category, representing approximately 19% of the portfolio. Our Financial Technology & Services category accounted for approximately 16% of our portfolio at fair value. Big Data & Cloud accounted for approximately 15%, while social and media -- Social & Mobile accounted for approximately 14% of our portfolio at fair value.

Please turn to Slide 8. As stated on our previous earnings call, it is our intention to hold public securities through a lockup period and the ensuing stabilization period. Accordingly, we sold our remaining position in Dropbox throughout the third quarter for a gain. Subsequent to quarter's end, we sold our entire position in Lyft for a sizable gain. We have now exited all of the public securities in our portfolio.

With this year's exit of Dropbox and Lyft, 2 of our top positions, a key area of continued focus is selectively adding new names to the portfolio to drive long-term value for our shareholders. Accordingly, 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 shown to provide scaled valuation growth before a potential IPO or strategic exit. A few industries of focus include blockchain, consumer retail, financial technology, food technology and transportation and logistics.

On our second quarter earnings call, we announced that Sutter Rock had committed to investments in GreenAcreage and Aspiration subject -- subsequent to quarter's end. We had also announced that we expected to invest an additional $7.5 million into a cannabis REIT investment trust. We are pleased to announce that each of these investments closed during the third quarter as expected, including Sutter Rock's new $7.5 million investment into Treehouse Real Estate Investment Trust.

Additionally, during the third quarter, Sutter Rock amended the structure of its investment in NestGSV, otherwise known as GSVlabs. The amended agreement restructured Sutter Rock's equity positions, not including its warrants, into a derivative security. The agreement is intended to protect Sutter Rock's downside while affording Sutter Rock upside participation. Sutter Rock will maintain its amended outstanding convertible note as well as its warrant position in GSVlabs.

We are also pleased to report noteworthy developments from Lime and OZY Media. On October 30, Lime's CEO, Brad Bao, spoke to CNBC regarding future IPO prospects for the company. In conjunction with the interview, Bao announced that Lime has now reached 100 million trips to date, with operations in more than 120 cities in over 30 countries across 5 continents. Lime reports that it is profitable in the vast majority of its markets and it was unit economic-positive as a company in the last quarter. To date, Lime has raised $777 million in funding and Bao expects the company to be profitable in 2020. While he declined to give specifics about timing in his interview, Bao noted that Lime plans to go public as it brings greater discipline to the financials and because the company wants its tens of millions of users to have an opportunity to be part of Lime.

Additionally, as announced last week, 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. OZY has now raised approximately $70 million in funding to date. As announced by CEO Carlos Watson on CNBC, OZY continues to see positive momentum in its television business and its event business and expects the majority of its revenue to come from these segments going forward. As reported by Axios, OZY's top line growth has approximated 50% year-over-year for the last 4 years, and the company expects to be profitable in calendar year 2020.

Looking ahead, we believe that Sutter Rock is well positioned to deliver long-term value. We are executing against a disciplined growth investment strategy with strong tailwinds. We believe the fundamentals of our portfolio are strong. The IPO environment continues to reward high-growth companies with strong paths to profitability, which has historically been a catalyst for our stock.

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, Controller & 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 September 30, 2019, including details of our liquidity position. I will also provide an update on our transition to an internally managed BDC and expense reduction initiatives in addition to providing further details on our current shareholder initiative.

We ended the third quarter with an NAV per share of $11.24, which is up from $10.75 per share last quarter. A breakdown of the increase in NAV for the third quarter is shown on Slide 9 and is consistent with our financial reporting.

In sum, the increase in NAV per share during the third quarter was largely driven by approximately $0.42 per share in net unrealized gain on investments, $0.09 per share in net realized gain on investments and an appreciation of $0.14 per share due to the accretive effects of common stock repurchase during the quarter. These increases to NAV were offset by a net decrease of $0.16 per share of net investment loss and the effect of estimated annual stock-based compensation on paid-in capital.

The $0.42 per share increase due to net unrealized gain on investments in the third quarter is largely attributable to the appreciation in value of certain existing portfolio investments, most notably Aspiration, Coursera and OZY Media. The $0.09 per share increase due to net realized gain on investments in the third quarter is attributable to the gains realized on the sale of our remaining publicly traded Dropbox shares during the quarter. As Mark mentioned, subsequent to quarter end, we also liquidated our shares of publicly traded Lyft stock.

Next I'd like to review Sutter Rock's liquidity at September 30, 2019. We ended the third quarter with about $57.6 million of liquid assets, including $45.2 million of cash and $12.4 million of marketable securities not subject to lockup agreements. Our cash balance of $45.2 million as of September 30, 2019, consisted primarily of proceeds generated by the monetization of various portfolio positions from the fourth quarter of 2017 through the third quarter of 2019 and remaining proceeds from the issuance of $40 million of 4.75% convertible senior notes due in 2023 during the first quarter of 2018.

The $12.4 million in marketable securities represents our publicly traded shares of Lyft. Subsequent to quarter end, we liquidated our entire Lyft position of 304,829 shares for approximately $13.3 million in total net proceeds, realizing approximately $9 million in total gains.

During the third quarter, we continued to see the cost-saving effects from the internalization of the management of Sutter Rock. 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, net of labor of management and incentive fees and an annual stock-based compensation expense estimate, decreased approximately 37% from the first 9 months of 2018 to a total of $6.5 million for the first 9 months of 2019. The decrease was primarily due to the elimination of management fees, incentive fees and costs under the prior administration agreement.

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

Finally, I'd like to wrap up with additional details of our current shareholder initiative. Please refer back to Slide 5 for an update on our share repurchase program. During the third quarter, we repurchased 605,327 shares of Sutter Rock Capital common stock for approximately $3.9 million. Subsequent to quarter end, we repurchased 28,000 shares for approximately $169,000. Since commencement of the share repurchase program in August 2017, Sutter Rock has repurchased approximately $20 million in stock, accounting for over 14% of the outstanding common stock at commencement of the program.

As Mark stated, on October 21, Sutter Rock commenced a modified Dutch Auction tender offer to purchase up to $10 million of our common stock at a price per share between $6 and $8. The tender offer will expire at 5:00 p.m. Eastern on November 20, 2019, unless extended. If the tender offer is fully subscribed, Sutter Rock will purchase between 1.25 million shares and 1.65 million shares or between 6.57% and 8.77%, respectively, of outstanding common shares.

Finally, as Mark alluded to earlier, on November 5, 2019, Sutter Rock's Board of Directors declared a dividend of $0.20 per share payable on December 12, 2019 to the company's common stockholders of record as of the close of business on December 2, 2019. The dividend will be paid in cash.

That concludes my comments. We would like to thank you for your interest and support of Sutter Rock.

Now I will turn the call over to the operator for the start of the Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Bill Hyler with WDH Capital.

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William Hyler, [2]

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I was hoping you could review with us the process you are using to calculate the fair value of the private portfolio of companies. I believe you are using a fair value approach with different levels depending on the available data for comparable companies and assets, but do the valuations generally approximate the last funding round for the company?

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

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Bill, thanks for the question. And obviously, this -- how we do valuation is integral to people's ability to evaluate what our NAV is and how they want to trade the securities. We actually have a very robust process that begins a couple of weeks before the quarter's end and goes straight through to numerous iterations, both internally and we have an independent valuation firm as well. We have a series of heuristics partially that deals with last rounds, may also deal with private transactions that are occurring in marketplaces, deals with market comps, and we iterate around that and then we come up with our valuation. We have the independent group come up with their valuation. We then compare and contrast and try to level set with one another. We then bring it up to our valuation committee who has comments, who push it back down to us with comments as management. Ultimately, it goes back up to value -- an audit committee and, ultimately, our Board of Directors.

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William Hyler, [4]

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Okay. Well, let me just -- a quick follow-up then, related. So for example, if Palantir was successful in obtaining a valuation of $26 billion, you would take that into consideration, but that would not be necessarily enough for you to raise the carrying value alone. Would that be fair?

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

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Obviously. Yes, what would be a fair statement is primary rounds are heavily weighted in the quarter in which they occur. Yes, but so do -- in the case of Palantir specifically, there is a great deal of secondary trading that occurs as well. So we have a long-standing series of heuristics and applications of that to come up with a valuation. Right, you should -- and if they do a round at a valuation that's significantly higher than we carry it, then that would impact our valuation, that's correct.

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Operator [6]

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(Operator Instructions) And we'll take our next question from Norman Mains.

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Norman Mains, [7]

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A couple of questions. Can you hear me, okay?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [8]

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Yes, we can. That's great. Sorry, we had a little bit of a problem. Go ahead.

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Norman Mains, [9]

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Yes. So on the Palantir, just to follow-up on the last gentleman's question, the $30.4 million fair value, is that a blend between your book value and the latest round? I just want to understand. Or should that be multiplied by 2.33 based on the $28 billion latest round?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [10]

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A couple of things. Our valuation, as we stated in the conference call, was at about $12 billion equity value. We haven't overlaid any other subsequent financings in our valuation line.

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Norman Mains, [11]

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So the $30.4 million fair value then would just be using the $12 billion, is that fair to say?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [12]

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That's correct. That's correct.

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Norman Mains, [13]

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Okay. And then, I guess, another obvious question, but I mean, I'll ask it because it's obviously -- it's not obvious to me. The $11.25 valuation that you guys are using in the press release, is that also -- I would imagine using that original $12 billion, right, not the $28 billion?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [14]

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No, sir. They are -- our $11.24 NAV is -- includes using the Palantir as we reflect it in our presentation at approximately the $12 million equity value -- $12 billion equity value.

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Operator [15]

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Ladies and gentlemen, this concludes today's question-and-answer session. I will now turn it back to speakers for closing remarks.

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [16]

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Thank you all very much for attending the call, and thank you for your support. And as always, we're available if you want to have conversations outside of the conference call. Thank you very much.

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Operator [17]

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Ladies and gentlemen, this concludes today's teleconference and you may now disconnect.