Facebook and Twitter as value investments?

No, I have not completely lost my mind and will not argue here that Facebook and Twitter are actually undervalued. 🙂 I have no idea what these companies are really worth. But I do think that there is a closed-end investment fund that might be an attractive speculation: the Firsthand Technology Value Fund (SVVC). Since this fund has both Facebook and Twitter as its biggest positions (17.0% and 22.4% respectively) a buyer of the fund indirectly owns Facebook and Twitter as well.

I have been following SVVC for a while. Bulldog Investors became involved in the closed-end fund last year and started pushing for change. Bulldog currently owns 14% of the outstanding shares of SVVC. The most important issues with SVVC are summed up nicely by Bulldog in this letter to SVVC shareholders (PDF). After a few more skirmishes between Bulldog and the fund, this matter ended as you could have expected: parties settled their proxy contest and worked out a compromise.

The result is that Kevin Landis keeps his lucrative management contract, but not without giving up some things. Even though he did escape from the jaws of the bulldog, he could not prevent it from running off with his pants so to speak.

As part of the settlement SVVC agreed to:

• repurchase up to $10 million of common stock in open market purchases during 2014
• conduct a self-tender offer for at least $20 million worth of common stock at 95% of net asset value to be completed no later than January 31, 2015
• liquidate its Facebook and Twitter holdings no later than September 30, 2014 and October 31, 2014, respectively, and to distribute any net realized gains from those holdings to shareholders within 60 days of completing those liquidations

SVVC’s last reported NAV (July 31) was $28.28 per share. The last closing price of SVVC is $22.29, so SVVC is currently trading at a discount of 21.2% to the last reported NAV.

The question now is whether this is a fair discount given the repurchase, self-tender and the upcoming liquidation of SVVC’s stake in Facebook and Twitter?

There’s a post on SeekingAlpha written in May that describes some things to take into consideration.

The two largest investments (39% of NAV) will be liquidated before October 31 and the net proceeds (after a 20% “performance fee” of the realized gains) will be distributed to shareholders. The fund recently announced the repurchase of up to $10m . Finally there’s a $20m self-tender at 95% of NAV that needs to be done by January 31, 2015.

After all this, the fund will mainly consist of a number of private technology companies and any cash that is left over. At that point I think the shares do warrant a substantial discount, because you’re left with a number of private companies and an investment manager that charges 2% of gross assets and 20% of any realized capital gains. If one or two of the private investments suddenly IPO’s and becomes a new hot tech stock, the story might change.

But I do think that the discount is likely to narrow before all the events noted above have taken place. Of course an investor would still bear the risk of a substantial decline in the market value of Facebook and Twitter. Facebook needs to be sold before September 30, so there shouldn’t be any quarterly announcements that can hurt the stock price there. Twitter needs to be sold before October 31 and could get hurt by poorly received Q3 results. Anyway, since the valuations of these social media stocks is based on so many assumptions and a lot of speculative investor interest, anything can happen to be fair.

Since I already have substantial exposure to US stocks I have decided not to speculate on SVVC. It is a decent chance to get perhaps a 10-15% return in a relatively short time, but I think the upside is too limited for me to increase my dollar exposure. If I had a smaller allocation to US stocks or a very large cash position and no good other ideas, I would probably allow myself to speculate on this one.

Disclosure: no position in SVVC.