Sharks are circling for this one

TomAndersonNote from editor: Please take your time and read this one slowly- this is first hand intelligence from a serious analyst who gives you an insight into how the big players work…

A closed end fund is like a gift basket.  Each of the items in the basket can be purchased individually and the total cost of the fund should be close to the sum of the items added together.  The one problem with this is that shareholders can’t sell off the items in the basket individually.  For this reason, the overall fund can sell at a discount to the sum of its parts but the difference is rarely more than 10%.

It isn’t unusual for closed end funds to trade at a discount but it is rare for the discount to be large.  We’ve found a company that is trading at a discount to value of 25% and the activist investors are starting to circle like sharks looking for technical ways to profit from this discrepancy.

The First Hand Technology Value Fund (SVVC) is one of the rare instances where this is the case and investors can profit from the price discrepancy.  SVVC was an interesting way to play the Twitter stock launch (Initial Public Offering or IPO) because the fund owned 1,000,000 pre-IPO shares.  However, rather than rallying, after the IPO, SVVC shares sold off dramatically while Twitter held it share price.  It could be investors rolling out of SVVC and into the underlying securities, it could be an indication of low confidence in the management company.  In the long run, it doesn’t really matter because the whole needs to trade near the sum of its parts.

If you use a $23.40 share price for SVVC, this is 25% below value and should work itself out over time but with any discrepancy in pricing, professionals will come in and find a way to claim the profit.  A small activist investor, Bull Dog Investments, is trying to force the company to use its excess cash to buy back shares which would act as a positive catalyst for the shares.

SVVC components

Facebook

3.81

Twitter

6.92

IntraOp Medical

2.23

AliphCom

1.10

Sunrun

0.71

Other Investments

4.59

Cash

11.67

Net Value

31.04

Share Price

23.40

Discount from Value

-25%

SVVC is controversial because of the high level of compensation that First Hand is paying itself for managing a low turnover portfolio.  The investor, Bulldog, recently filed a report that shows it has voting power over 7.4% of the shares.  Heading into the Twitter IPO, the company had been selling steadily but made a 180 degree turn on November 7th when it started buying and buying heavily! Since November 7th, after several months of steady selling, it purchased 299,866 shares and is now on the attack again.

Bulldog’s position consists of 674k shares or 7.4% of the company, representing the largest shareholder in the company.  It is widely believed that Bulldog is trying to leverage its capital to increase its presence on the board of directors and in time force out the current investment advisor, First Hand Funds.  This would leave the door open to appoint a manager that would be more open to a buyback and possibly other structural changes.

Whether Firshand decides to save its position by enacting a share buyback ahead of the next board meeting or Bulldog gets the two seats it needs to hire a new fund manager is brings about the same end, the valuation gap between the parts and the whole.  Even if the valuation gap closes only to 10%, it would mean a $28 share price and a quick 20% profit!

Tracking the Jackpot,

Tom Anderson.

Bookmark and Share facebook twitter twitter

Leave a Comment

*