On April 15 this year, Phil Goldstein and his Bulldog Investors group filed another Schedule 13D as owner of 9.67% of the outstanding shares of the Firsthand Technology Value Fund (SVVC). Shortly thereafter, the Bulldog group reported they owned 9.8% of outstanding shares. SVVC is a closed end fund “that invests in technology and cleantech companies, disclosed today that its top holdings as of April 30, 2013 were Twitter, Facebook, SolarCity, Silicon Genesis, QMAT, and Wrightspeed.”
The reason behind Bulldog’s activist stake in SVVC is quite simple: the performance of SVVC has been egregious—especially in light of the asset manager’s fee arrangement of 2% per annum of its gross assets plus 20% of any net realized capital gains—and Bulldog wants to unlock value for shareholders by removing Kevin Landis as the asset manager and replacing him with someone more competent, most likely themselves. Additionally, if Bulldog gained influence over SVVC, they would likely advocate using SVVC’s cash hoard (nearly 68% of net assets) to repurchase shares.
In regards to SVVC’s performance, Goldstein writes (emphasis mine):
As an open-end fund, in the first quarter of 2000, the Fund's NAV peaked at about $135 per share. By April 2011, when it was converted to a closed-end fund, its NAV had fallen to about $27 per share. That is a decline of 80% in shareholder value over a period of eleven years. Nor have those shareholders who held on to their shares since April 2011 in hopes of improved performance, fared any better. Over the next two years, the market price of their shares fell another 30% while tech stocks generally performed very well!
Bulldog even reached out to Landis to ask if he was satisfied with SVVC’s performance or concerned about its discount to net asset value. Landis told Bulldog he thought everything was fine (which just seems insane to me). Bulldog finds it inexplicable that the board has not already terminated Landis’s management agreement, which is why they are now urging shareholders to vote to terminate it.
Why You Should Invest in SVVC Alongside Bulldog
I believe Bulldog will eventually be successful in their campaign to oust Landis as manager. Once they do so, chances are extremely high they will become the manager of the fund and merge its $200 million net assets with their Special Opportunities Fund which they also manage under the name of Brooklyn Capital Management.
An SVVC shareholder will benefit primarily by the closing of the gap between NAV and share price. The current NAV is $23.26 and the current share price is $19.84, which is a discount of about 15%. An additional benefit to this investment is the performance will be uncorrelated to the general market as it is predicated upon the success of the Bulldog group’s campaign.
Finally, I strongly believe there is a moral case behind this investment. There is absolutely no reason why a man like Kevin Landis to continue as fund manager. He has had abysmal performance and yet has continued to be rewarded handsomely. At best Landis is a huckster and at worst he is a thief. By investing alongside the Bulldog group and removing Landis, investors and our society will undoubtedly be better off.
Risks to the Investment
The primary risk is that Landis puts up a huge fight (as he might since his livelihood and what little reputation he has are at stake) and Bulldog gives up. However, Bulldog has its name for a reason: it is a tenacious group of investors that have specialized in these situations with good results since its inception in 1992. The chances of Bulldog failing to unlock value in this endeavor are fairly low in my opinion.
Investing in SVVC alongside the Bulldog group will likely result in a 10%–12% uncorrelated return assuming (1) Bulldog successfully removes Landis and replaces him with a more competent manager with a more reasonable fee and (2) Bulldog successfully prods SVVC into using its excess cash to repurchase shares to close the 15% gap to net asset value. Not only do I think this will be a profitable investment, I also think this will be a socially beneficial investment. When Kevin Landis is removed, he will no longer be in a position to steal from investors with his horrific performance and excessive compensation.
- February 12, 2013 letter to Special Opportunities Fund shareholders (page 2)
- April 10, 2013 letter to SVVC shareholders
- April 22, 2013 letter to Kelvin Leung, Secretary of SVVC
- Short bio of Phil Goldstein by Santangel’s Review
- Firsthand website
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