Ian Wyatt has teased “venture capital” style investments before for his Million Dollar Portfolio newsletter, but this one has at least one name that hasn’t popped up before… so I thought I’d take a look for you. (And from what I can tell it used to be the $100K portfolio, so I guess he’s doing OK — don’t know if the boost in the portfolio is from his publishing business or from his investment returns.)
The basic idea is not unfamiliar, and it’s as old as the markets themselves: How do you “get in early” and buy part of a company before it goes public and (sometimes) has that crazy spike in valuation in an IPO? It’s extraordinarily tempting, partly because we see headlines every day about Uber and its $40 billion private market valuation, or, in years past, about early investors in Twitter, Facebook, Google, etc. who paid far, far less than you and I have to pay to buy a slice when those companies go public.
Of course, we rarely think about all the venture-backed companies who don’t go public — the vast majority of early stage capital investments that never pay off, with ideas and technologies that once seemed appealing surpassed by competitors or made irrelevant by new advances or, simply, revealed in the fullness of time to not be nearly as appealing as they were at first blush. Venture capital is a risky world — highly lucrative for those who are good at it, since the occasional million-percent gain on a Facebook investment makes up for a lot of duds, but still extraordinarily risky. There’s a reason why venture investors get very involved in the companies they back: the companies usually have very uncertain futures and need a lot of adult supervision.
Here’s how Ian Wyatt gets us interested this time around:
“Is it really possible to make gains of 1,000% – and more – on just one company – before a single share ever trades on the market?
“You bet it is… and it’s happening every day… inside the hottest and most exclusive market in the world.
“Unfortunately, regular investors have been locked out of this multi-billion dollar market for years. Yet I’ve found not one… not two… but three distinct ways to participate in these secret deals.
“I’m buying each one for my private investment account now… and I’d like to invite you to join me.”
So… what are these three “ways to participate” in the “secret deals” of venture capital? We get teased about them, one by one. The first one is the one I haven’t seen touted before… here’s how he gets us started on that one:
“I’ve found a way to get into a company worth $3.5 billion…
“For less than $4 a share.
“It’s the chance to play the game just like the big venture capital firms…
“And I’m inviting you to play along with me.”
So what is it?
It’s a company that has gotten in early on one of the “fintech” innovators, a company that Wyatt thinks will go public this year with a $3.5 billion valuation… it’s getting attention that is not unlike the excitement we saw over Lending Club (LC) with their IPO late last year (though the stock is down since then)… here are some hints about that portfolio company:
“Fintech is using the power of computer technologies to completely by-pass banks and other traditional lending institutions…
“By connecting large groups of people together for the purpose of lending and borrowing money.
“And this small $3.5 billion company has been taking on one of the biggest monsters in the banking industry – one that’s been in the news a lot lately…
“The company’s been raising money for cash loans for college students – without getting the government involved.”
So who is this venture investor that lets you in the “backdoor?” Here’s some more clues:
“I’m buying shares in a company that’s become one of the shrewdest venture capital firms around…
“And it’s invested $85 million so far – and owns 25% in this $3.5 billion FinTech firm…
“And when this Fintech company goes public – as it’s expected to later this year…
“This VC firm’s 25% stake will be worth $875 million – nearly 10 times more than their original investment….
“… you can get into this company – and by extension, the $3.5 billion Fintech firm – for just $4 share! ….
“… you also get a piece of the all the other companies this company’s helped finance – before they go public…
“This company has invested:
“$70 Million for 15% of this online mortgage marketplace
“$40 Million for 10% in this boutique online investing startup…
“$110 Million for 20% of China’s leading online car sales marketplace
“$30 million for 25% of this direct emergency credit startup
“$40 million – for an undisclosed stake – in this financial information specialist
“And that’s just a handful of the more than 30 companies this little-know venture capital firm owns.”
Who is it? Thinkolator sez Wyatt is teasing… Renren (RENN)
Interesting, right? It’s not one of the “traditional” venture capital investors or BDCs, it’s a tech company — operating China’s homegrown copycat version of Facebook — that happens to also have spent a ton of money investing in other tech companies, both in China and elsewhere.
But it’s also a little bit controversial right now — the company has seen their core Chinese social media business flounder, with falling revenue, and the founders of Renren, who own 49% of the company, are offering to take it private at $4.20 a share (a 15-20% premium to where it’s trading now, around $3.65).
The “fintech” company teased is Social Finance, usually called SoFi, and they have been a disruptive leader in student loan financing — and yes, they are widely expected to go public over the next year or so. SoFi offers a “nontraditional” underwriting process and technology, does peer-to-peer lending, and also (most importantly, because it creates much larger loan capacity) securitizes student loans and sells them into the yield-hungry credit markets.
They’re new, and they haven’t really been tested during times of credit duress, so they haven’t yet had any defaults to speak of — and investors, borrowers and Wall Street in general all seem enamored with SoFi. The venture capital fund that I have a (very) small investment in personally, the Sharespost 100 Fund (PRIVX), also owns a tiny slice of SoFi — it’s less than 5% of their portfolio as of the end of last year.
That’s really the rub for most of the funds and diversified venture capital investments — you go into it looking for the sexy 1,000% returns, but they’re diversified and often have very small holdings in each pre-public company, so in my case with Sharespost 100 and their 4.5% holding in SoFi, if SoFi rises in value by 500% or so as it rolls up to the IPO (which is no doubt a stretch) then perhaps my effective $140 that’s exposed to SoFi (out of a $3,000 investment) could rise to, say, $750. That’s nice, boosting the $3,000 to perhaps $3,600 and providing a 20% return — but you have to also assume that one or two of the holdings will have lost value during that time. PRIVX has had two companies “exit” the fund in buyouts, and neither one made much money for them because they’re not getting in on the very earliest stages — they’re mostly buying shares from employees and insiders who want to sell a few shares to generate some cash because they can’t wait around for the liquidity of the IPO.
But that’s beside the point — Renren is a very different beast, a failing social media company that has invested pretty heavily in a number of other companies, and doesn’t offer a lot in the way of disclosure about those investments. To my eye, it looks like Renren’s management is substantially better at investing in social finance companies than they are at operating a social media business, though it could just be that they were too easily squeezed out in the extremely competitive Chinese “social internet” space by larger companies like Tencent, Alibaba, Baidu and others. It looks like they’ve probably invested about $400 million into SoFi and their other portfolio companies in total (just doing the rough math from reading a few articles about it, that may not be very accurate), and they currently have a little over $400 million in cash and carry their investments on the books with a valuation of about $575 billion, so you can pretty easily justify the company being worth about a billion dollars even if you ignore their core business. The market cap is about $1.25 billion, so the market’s either valuing the investments at more than they’re carried on the books or they’re assigning some value to Renren’s operating business.
And really, at this point it’s largely like Yahoo in their pre-Alibaba IPO days — a game of “what’s the company worth because of this big investment they made in a different company.” Almost no one is arguing that Renren is going to turn around their core business, but some folks think the venture capital investments they’ve made are worth far more than their carrying value. A lot of that revolves around SoFi — Renren owns 25% of the company, so if SoFi really does go public at a $3.5 billion valuation without diluting the capital base too much (meaning, most of the shares sold in the IPO already exist and are owned by insiders or venture capital firms), and Renren still owns, say, 20% of the company after the IPO, then that’s an impressive $700 million “hidden” asset. Toss in the $400 million in cash, and you don’t have to assume much about either their operating business or their other early stage investments to think that the company is a reasonable buy at $1.25 billion.
Which is, perhaps, what the controlling shareholders are thinking. I haven’t seen a reaction to the “going private” offer from Softbank, which owns a large stake in Renren, but it’s a bit of a game of chicken — the more quarters that go by with the company losing money on their Renren operating business, the more cash they burn, so do you let them take it private at only $4.20 now and make sure you can get your money back from the pretty scary Chinese market? Or if you’re pretty sure that the investments in SoFi and Lending Home and Motif Investing are going to be worth more than the current book value, do you hold out and see if they’ll raise their offer? The shares did not move up in response to the go private offer, so I imagine everyone’s feeling a bit conflicted — particularly with so many Chinese stocks crashing, and probably making them question the value of the Chinese venture capital investments Renren has made (they’ve invested mostly in social finance/fintech companies, about half with Chinese business and half, like SoFi, in the US). I’d be a little bit afraid of any small/social loans made in China recently, given the impression I have that almost the whole country got wrapped up in both real estate speculation and going into debt (margin and otherwise) to gamble on the recently-crashed stock market, but SoFi does look like it’s going to make it as a decent business if they can IPO in a good market so maybe that will help make up for other problems.
So… an interesting speculation, given that it’s trading pretty close to book value and has a lot of cash and some venture capital investments of unknown but possibly large value like SoFi, made more complicated by the weakness of their core business and the uncertainty over China in general and, most recently, by the offer of management to take over the company at $4.20. If you assign a lot of value to SoFi and Renren isn’t cooking the books or otherwise hiding something nasty, then the downside should be quite limited — either they do go private at $4.20, or they get credit from SoFi’s expected rise into an IPO. If you’re extra skittish about China, or don’t like the looks of SoFi, this one won’t appeal to you much at all — their other investments are all probably significantly further away from an IPO than SoFi and are of even more uncertain value. I’d say the cash is about $1.25 per share and their SoFi stake is probably worth about $2 per share if the news reports about the IPO are at all accurate, so if those two hold up the logical downside is pretty limited. It’s a strange situation, though, and logic doesn’t always hold in these cases.
That’s about all I can tell you, I like looking into these kinds of “hidden value” ideas, and venture investing is always interesting to think about, but I haven’t learned enough about Renren to be excited about buying it into those possible go-private deal — if it sounds interesting to you, by all means, go forth, researchify, and let us know what you think.
And yes, I went down the rabbit hole for a bit too long on this one, so I’ll get into more detail on the other two opportunities Wyatt teased in a future piece. Thanks for reading!