Facebook’s FB +3.00% disastrous stock-market debut sheds new light on the hazards of investing in funds that invest in private companies. FB +3.00%
GSV Capital GSVC -0.20% and Firsthand Technology Value, SVVC +0.22% two funds designed to give retail investors exposure to tech companies before their initial public offering, have lost 37% and 32% of their values, respectively, since Facebook went public.
That is an even steeper drop than Facebook itself has seen. Since the social-networking company priced at $38 a share and went public on May 18, its price has dropped to $27.10, a 29% decline.
The funds’ steep drops might appear to make little sense. As of May 31, Facebook accounted for only about 7% of Firsthand’s assets, according to the company. At GSV, as of June 5, it accounted for about 3.8%.
Last year, when Facebook shares were a hot commodity, the funds benefited. When GSV Capital bought $6.6 million worth of Facebook last June, its share price rose 42% in one day.
‘An Outsize Influence’
“On the way up, Facebook probably had an outsize influence on our stock price, and on the way down, it certainly has,” says Michael Moe, who manages the GSV fund, which has a market value of about $200 million.
In fact, Firsthand’s current share price of $18.29 is less than the amount of cash it has on hand—which was more than $19.33 a share as of Friday, according to fund manager Kevin Landis.
That means someone buying a share of Firsthand is in effect getting about $1.04 in cash—and every other company that the fund owns free.
The steep declines are possible because of how the funds are structured. Both GSV Capital and Firsthand Technology Value are “business-development companies,” a type of publicly traded private-equity fund that typically invests in small to midsize companies and start-ups.
Unlike the prices of normal mutual funds or exchange-traded funds, the share prices of business-development companies can deviate significantly from the value of their underlying assets.
One reason: For the fund’s private holdings, it isn’t altogether clear what the value of the underlying holdings is, says Geoffrey Bobroff, a mutual-fund consultant based in East Greenwich, R.I.
Shares of private companies, unlike those of publicly traded companies, change hands infrequently. That means you must take whatever values fund companies put on private shares with a grain of salt, Mr. Bobroff says.
Greg Mason, a senior analyst who covers business-development companies at regional brokerage and investment bank Stifel Nicolaus, says it’s normal for such funds to trade below the value of their assets—but that he never has seen a fund’s price dip below its cash value.
Facebook CEO Mark Zuckerberg
Firsthand’s cash position is so high because it recently raised more money and hasn’t yet invested it. Once the cash is invested—presumably in shares of other pre-IPO companies—Mr. Bobroff says investors will face the same valuation questions that haunt the rest of the private market.
Even though Facebook makes up only a small portion of the funds’ portfolios, there are indications that the values of some of their other holdings also might be dropping.
In their latest auction shortly after the Facebook IPO, shares of Twitter sold for $18 a share, down about 15% from April, says Sam Hamadeh, CEO of PrivCo, which tracks data on private companies. Shares of Gilt Groupe, an online luxury-goods retailer, dropped 10% on secondary markets in the week after the Facebook IPO, he said. Shares of other private tech companies likely will follow suit, he says.
“It’s a game of chicken. Sellers feel like they can get the same price as a month ago, and buyer demand isn’t there at that price,” Mr. Hamadeh says. “Sellers will have to adjust their expectations to market realities.”
And even though Firsthand’s share price is below that of its cash holdings, Mr. Bobroff says, there isn’t an easy way for investors to take advantage of that quirk other than buying the fund and hoping the market adjusts.
Article written by JOE LIGHT