Home Venture Capital SuRo Capital: New Developments (NASDAQ:SSSS)

SuRo Capital: New Developments (NASDAQ:SSSS)

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Written by George Spritzer, co-produced by Alpha Gen Capital

SuRo Capital (NASDAQ:SSSS) is an exchange-traded venture capital BDC with a shareholder-friendly management that provides a good way to invest in pre-IPO companies. It is a liquid vehicle with no lockups. For more background and history on the fund, you can read my first article on SSSS published back in December 2020.

Fund Performance

The long-term performance for SSSS has been excellent since the change to internal management in 2018. I have shown the total return performance below for the last five-year period compared to stocks in Morningstar’s asset management sector.

Time Period

SSSS Return

Sector Return

5 Years annualized

30.68%

7.03%

3 Years annualized

38.36%

8.40%

1 Year

-0.10%

-13.89%

YTD

-38.32%

-23.52%

3 Months

-32.60%

-18.20%

Source: Morningstar as of May 16, 2022

Chart
Data by YCharts

The official net asset value (or NAV) of SSSS is only published quarterly. As of March 31, 2022, the NAV was $12.22, and the closing price was $8.63. The discount to NAV based on the March 31 closing price was 29.4%.

A big factor going forward when computing a future estimated NAV is what happens to the price of Forge (FRGE) after the lockup restrictions are removed. FRGE stock is highly volatile and often has daily price swings of over 10%.

Recent Distributions

Below are the distributions paid by SuRo Capital since my last article in December 2020.

  • $0.22 per share paid January 15, 2021
  • $0.25 per share paid February 19, 2021
  • $0.25 per share paid April 15, 2021
  • $2.50 per share payable June 30, 2021
  • $2.25 per share payable Sept. 30, 2021
  • $2.00 per share payable Dec. 30, 2021
  • $0.75 per share payable Jan. 14, 2022
  • $0.11 per share payable Apr. 15, 2022

From the March 9, 2022 press release:

2021 was a momentous year for SuRo Capital, as we achieved many milestones as a firm. We reached our highest ever NAV per share, our highest dividend-adjusted NAV per share, and our highest year-end net assets under management in firm history. We were able to take advantage of both a strong demand for high growth technology businesses as well as a strong IPO market and M&A environment to monetize over $258 million of our portfolio assets.

As a result, we had the most successful year for shareholder return in our history, declaring a total of $8.00 per share for over $212 million in total distributions,” said Mark Klein, President and Chief Executive Officer of SuRo Capital.”

Recent Share Repurchases

SSSS has done both share repurchases and new share offerings in the past. This may seem odd, but it makes a lot of sense, since share repurchases were done when the shares were trading at a discount and new share offerings were done when shares traded at a premium. In both cases, these actions are accretive to net asset value and good for shareholders.

The Share Repurchase Program began in August 2017. Since then, SSSS has repurchased about 5.4 million shares of its common stock for an aggregate purchase price of approximately $35.3 million.

  • On March 13, 2022, SuRo Capital repurchased 153,517 shares for $1.4 million.
  • In April 2022, SuRo Capital repurchased another 431,134 shares for $3.7 million.

There is still $19.6 million left in the Share Repurchase Program which is authorized through October 31, 2022. At current price levels, these repurchases will be highly accretive to NAV.

The chart below summarizes the Share Repurchases since Inception

Table of share repurchases

SuRo Capital Share Repurchases (SuRo Capital website)

Portfolio Holdings

SSSS runs a concentrated portfolio. The top five positions account for approximately 71% of the investment portfolio. As of March 31, 2022, the top 5 positions accounted for 62.8% of the portfolio. The top 10 positions account for about 80% of the portfolio.

Top 5 SSSS Holdings (as of 3/31/2022)

Percent of Port.

Cost Basis (MM)

Fair Value (MM)

27.4%

Course Hero, Inc. (CRSH)

$15.0

$76.8

22.3%

Forge Global, Inc. (FRGE)

$ 2.5

$62.7

4.9%

Blink Health, Inc.

$15.0

$13.8

4.1%

Aspiration Partners (ASPP)

$ 1.3

$11.5

4.1%

Stormwind, LLC

$ 6.4

$11.5

62.8%

Totals

$40.2

$176.3

The above valuations are as of March 31, 2022, and the current values have likely changed quite a bit since then. For example, CHGG is in the same industry as Course Hero and has fallen about 50% since Mar 31.

On the last conference call, Mark Klein gave the following estimate on the NAV value as of May 3:

“At the end of the quarter, SuRo Capital had a net asset value of approximately $381 million or $12.22 per share.”

“Holding our private portfolio company valuation static as of quarter end and using share prices of our public companies as of yesterday May 3, inclusive of all applicable discount accounts for liquidity. We estimate the potential current impact of the volatility of the overall decline to be in the range of $0.55 per share decrease. This is primarily driven by the volatility of the Forge Global public share price.”

The estimate for current NAV on May 3 would then be around $11.67, which means the $7.17 common price is still trading at a significant discount to NAV.

Here are some comments from the CEO about two large holdings from the last earnings call:

1) Course Hero: “Course Hero, our largest position announced on December 14 that they had raised $380 million at a $3.6 billion valuation in their Series C financing one which we participated in. The company has used these funds to accelerate its goal of building a learning ecosystem that meets the evolving range of study needs for today’s learners.

We believe Course Hero’s recent fundraise gives them a significant advantage as they now have an ability to acquire companies and assets at attractive valuations. In 2021 alone, the company completed acquisitions of LitCharts, QuillBot, CliffNotes and Symbolab, which positions them to grow their subscriber base. In 2022, they’ve continued this strategy with the acquisition of the Netherlands based company Scribbr.

Given the acquisitive nature of the company and the degradation of values in both the public and private markets for education technology companies combined with a significant amount of capital to deploy Course Hero has a great opportunity to grow and to thrive.”

Here is a link to an interesting Tech Crunch article on Course Hero that describes how they are using acquisitions to build up their education platform: For Course Hero, venture capital was once an unobvious solution

2) Forge Global:” In February, Forge Global release its full year 2021 financial results showcasing both record revenue and trading volume. The company’s net revenue grew 75% year-over-year in 2021 to $125 million. Forge’s success was driven by its trading volume, which grew 71% in 2021 to $3.2 billion.

In addition, the company continues to gain traction with Forge Intelligence, its private market data platform subscription service. On March 22, Forge Global was officially listed on the New York Stock Exchange under symbol FRGE via SPAC merger. The merger completed with Motive Capital Corp. brought in gross proceeds of $215 million. Since Forge’s public market debut, the stock has experienced extreme volatility, reaching a high of $47.50 in a low of $11.6.”

Phone Chat With Mark Klein

1) I asked Mark about the recent fixed offering in December, 2021 of $73 million in 6.00% Notes due 2026 (SSSSL). The Special Opportunities Fund (SPE) is a shareholder in SSSS and they recently issued a 5-year convertible preferred (SPE-C) with an interest rate of only 2.75%. I wondered if SSSS had considered using a convertible offering instead of SSSSL to get a lower interest rate.

Mark responded that SuRo Capital has used convertible financing in the past and would consider using them again. But he said they used fixed financing this time around, since they have been paying out a lot of distributions. With a convertible preferred, the conversion ratio is adjusted upward with each distribution and they felt that this could cause too much dilution of the common shares.

2) SSSS has a policy of selling off positions shortly after they start trading in the public markets. I asked Mark if other opportunistic investors could potentially take advantage of SSSS by shorting the stocks right before the lockup periods expired.

Mark assured me that SSSS does not just blow out shares using market orders the first day after a lockup period expires. He commented that some CEOs of startup companies actually do that and get very poor execution prices.

He said that SSSS has the flexibility to wait until stability returns to a stock before doing any selling, and they have been very careful in exiting publicly traded positions. But he did say that SSSS still plans to exit publicly traded positions once they stabilize. Shareholders can own these stocks on their own or purchase ETFs and mutual funds to own publicly traded stocks.

The sales of publicly traded companies also allow SSSS to pay out large distributions which are popular with many shareholders.

3) Has SSSS considered deploying any cash in a SPAC arbitrage strategy?

Mark said he was quite familiar with the SPAC arbitrage strategy and actually ran a private fund using this strategy some years ago. He felt it was a good strategy right now for investors looking for a low-risk cash substitute. But he felt it was not appropriate for SSSS since it can require a lot of trading and he felt that most SSSS investors want the fund to focus on venture capital investing.

4) Where do you see future opportunities for SuRo Capital?

Mark said they see a lot of opportunities in sports technology infrastructure and Web3. They recently hired a full-time analyst who is an expert in the sports technology space. There are currently three holdings listed in the SuRo Capital Sports portfolio:

  • Bettorview
  • Compliable
  • Pickup

Summary

SSSS provides an excellent way for non-accredited investors to participate in venture capital investing. The management is shareholder friendly and they invest in higher quality companies in the venture capital space.

SSSS provides daily liquidity which is not available in most alternative private equity investments. The recent price swoon provides investors with a good opportunity to buy SSSS at a significant discount to NAV. Ongoing share buybacks will be accretive to NAV.

The CEO, Mark Klein, owns 711,296 shares of the common stock. The CFO Alison Green owns 65,257 shares.

SSSS is fairly liquid and has an average trading volume of about 300,000 shares a day. The bid-ask spread is usually only a penny. If you buy SSSS, it pays to keep an eye on FRGE and adjust your limit price accordingly, since it has an impact on the estimated NAV of SSSS.

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