Q4 2021 SuRo Capital Corp Earnings Call
Yeah.
Please standby were about to begin.
Good day, ladies and gentlemen, and thank you for standing by welcome to the zero Capital's fourth quarter and fiscal year 2021 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation. The conference will be opened for questions.
As a reminder, this call is being recorded today Wednesday March 9th 2022.
I would now like to turn the conference over to Mr. Adam dates of serial capital. Please go ahead.
Thank you for joining us on today's call I'm joined today by the Chairman and Chief Executive Officer of Zero capital, Mark Klein and Chief Financial Officer, Alison Greene. Please note that a slide presentation corresponding to todays prepared remarks by management is available on our website at www Dot zero cap dotcom.
Under Investor relations events and presentations.
Today's call is being recorded and broadcast live on our website at Www Dot zero capped out.
Replay information is included in our press release issued today. This call is the property of <unk> capital.
There is a reproduction of this call in any form is strictly prohibited.
Also like to call your attention to customary disclosures in today's earnings press release regarding forward looking information.
Statements made in today's conference call and webcast may constitute forward looking statements, which relate to future events or future performance or financial condition.
These statements are not guarantees of our future performance or future financial condition or results and involve a number of risks estimates and uncertainties, including the impact of COVID-19, and any market volatility that may be detrimental to our business our portfolio of companies our industry and the global economy that could cause actual results.
To differ materially from the plans intentions and expectations reflected in or suggested by the forward looking statements.
Actual results may differ materially from those in the forward looking statements as a result of a number of factors, including but not limited to those described from time to time in the company's filings with the SEC.
Management does not undertake to update such forward looking statements unless required to do so by law to obtain copies of store capital's latest SEC filings. Please visit our website at www Dot zero cap dot com or the SEC's website at SEC Gov, now I would like to turn the call over to Mark Klein.
Thank you Adam.
Good afternoon, and thank you for joining us we.
We are pleased to share the results of serve capital's fourth quarter and fiscal 2021.
2021 was a momentous year for Cerro capital as we achieved many milestones as a firm.
Reached our highest ever and a per share our highest dividend adjusted NAV per share and our highest year end net assets under management and from history.
We were able to take advantage of the strong demand for high growth technology businesses as well as a strong IPO market and M&A environment to monetize over $258 million of our portfolio of assets.
As a result, we had the most successful year for shareholders in our history, declaring a totaled $8 per share equating to over $212 million in total distributions.
To put that quantum of dividends in perspective, our share price at the beginning of the year was $13.02.
Our NAV was approximately $302 million.
On a percentage basis, our 2021 games equates to 70% of our NAV and approximately 61% of our share price at the beginning of the year.
In addition to the monetization and distribution activities. During 2021, we were also able to access the nonconvertible debt markets for the first time, raising $75 million of 6% notes.
This capital raise in addition to the funds we've retained after our sales.
Gives us the capital to take advantage of opportunities given the dislocation in both the public and private markets.
As we have discussed we felt by late summer the private and public markets, we're getting a bit frothy.
We made it clear to you that we did not intend to immediately deploy the capital derived.
Our sales and our debt interest issuance and instead believe there would be better opportunities in the future.
We made investments of $11 million in Q4 comprised of a follow on investment and of course hero.
And one new portfolio company.
For the year, we made approximately $82 million of investments, which represents less than one third of the funds. We received from our just dispositions.
Turning to Q4, we ended the quarter with a net asset value of $364 8 million or $11 72 per share.
This is inclusive of $2 75 per share of dividends declared are payable during the quarter.
This.
Compares to a dividend adjusted $12 <unk> in Q3, and a dividend adjusted $7 and 14th.
At the end of 2020.
Consistent with our desire to be shareholder friendly and our continued practice to distribute our realized gains on a transparent and timely basis.
March as the Cerro capital Board of Directors declared an <unk> 11 cash dividend.
The record date will be March 25th and the payment date will be April 15th.
Please turn to slide four.
Turning to our top five positions I want to highlight first and foremost our cash balance.
As of year end, our cash available for investments was approximately $175 million, representing 40% of our gross assets.
As we will discuss in a couple of minutes, we believe having cash in this environment gives us a unique and exciting opportunity to take advantage of market dislocation and volatility.
Course hero, our largest position announced on December 14th they had raised $380 million at a $3 6 billion dollar valuation as part of their series C financing, which we also participated in the <unk>.
Company plans to use these funds to accelerate its accelerated its goal of building a learning ecosystem that meets the evolving range of studying needs for today's learners.
This aligns with Coursera course, hero's current focus of acquiring companies that expand our already comprehensive catalog of students study materials beyond the traditional college students pursuing a credential.
In 2021 alone the company completed acquisitions of lit charts krill bought cliff's notes and symbol at.
All of which help them to grow their subscriber base.
As previously discussed on November eight 2021 next door was officially listed on the New York Stock exchange under the symbol K I N D. Yes back merger.
<unk> was completed with coastal ventures acquisition, too and an equity value of $4 3 billion.
With $674 million in gross proceeds from the transaction, which next door is plenty to use to accelerate the growth on their platform.
Last week next door reported its fourth quarter 2021 earnings recording $59 million in fourth quarter, 2021 revenue and 120 and $192 million and full year 2021.
Next door's 2021 revenue beat its prior $181 million guidance, which we gave to investors in September of 2020.
This success was attributed to the company's increasing its user engagement growing its average revenue per weekly active user by 33% year over year. In addition, next stores fourth quarter weekly active users accelerated for a second straight quarter, increasing by 32% year over year to 36.
6 million users.
I look forward to seeing next-door cultivate a hyper local communities and builds real world connections as they expand.
On February 15th forged global released as full year 2021 financial results generating record revenue and trading volume.
The company's net revenue defined as revenue less transaction based expenses.
75% year over year in 2021 to 125 million $2 million more than its previous forecast.
<unk> success was driven by its trading volume, which grew 71% in 2021 to $3 2 billion.
In addition to the continued growth of its traditional trading business, which surpassed $12 billion in cumulative trading volume. The company continues to gain traction with forge intelligence, it's private market data platform so buyers subscription.
In conjunction with its trading business. This data product is bringing transparency to pre IPO liquidity and enabling investors to access this.
This market, we are excited to see forge and motive complete their spec merger shareholder vote is scheduled for March 15th.
We look forward to the continued success by Ford Porsche as it provides unique and differentiated service to their users.
I'd like to provide an update on our private credit strategy.
In February 2020, we announced the expansion of our investment strategy into private credit with the appointment of Carrington as a senior managing director and senior member of the investment Committee.
Since then we've been.
Evaluated multiple opportunities and then executed three private credit investments each performing at or above expectations.
From the onset we plan to expand the capital pool available for these private investments, including evaluating potential joint external partners.
This morning to Cora capital management announced that it had raised $250 million from Peter till its first close of the fund which will be led by Carrie.
We are excited by the launch.
Looking together to continue our credit strategy.
On a more macro basis I'd like to take a step back to comment on the current conditions in the private and public markets to discuss both what we have seen in 2021 and our go forward plan to execute on our significant amount of investable capital.
As investment managers, we understand that investors hopefully appreciate what we've done for them in the past. However, the true question is what can we do for them now.
U S equity markets, our record volume issuance in 2021, reaching over $650 billion in total issuance with IPO in Spacs transactions accounting for roughly 50% of that.
All major indices reached all time highs and since then the broader market has suffered an IPO issuance has dropped precipitously.
That in perspective as of yesterday.
<unk> 500 was down over 10% from the ties and the NASDAQ was down almost 20% from its highs.
Capital issuance was only $21 million $1 billion through the first two months of 2022, representing a significant pullback from the peaks in 2021.
As investors Digest, the inflationary environment, the current political climate and the further impact from COVID-19. It is clear that high growth technology valuations have been the subject of heavy scrutiny as 2021 ended in 2020 to begin.
75% of the 2021 Ipos are now trading below their issue price and several ipos have been had been withdrawn or postpone.
That market has experienced similar challenges to the IPO market with roughly 81% of the closed transactions trading below $10 and investors redemptions on announced transactions, reaching a record high of 90%.
Additionally, there is a disconnect between the private and public markets that has widened during the second half of 2021 and beginning of 2022.
We remain judicious on valuation during this period.
Although our pipeline is as robust as ever we've made only one investment in the last quarter.
Given our significant amount of investable capital, we're excited to seek out new opportunities as companies are once again, staying private longer while they avoid turbulent market conditions.
As we see the private markets begin to realize public valuations, we are well positioned to deploy capital.
We remained focus on valuation as we evaluate the ever expanding opportunity set that our firm has seen.
Selectivity and patients are needed in volatile markets and given the size of our investable capital. We were planning to act on opportunities in a prudent and strategic manner.
As always it is our intention to be as transparent as possible in respect to our dividend distributions.
Given present market conditions, coupled with lockup restrictions on some of our public Securities Securities.
We do.
Do not currently have enough clarity as to the timing and the amounts of our future distributions.
Distributions.
As discussed extensively our intent is to sell our public positions with Lockups expire and there is relative stability in the marketplace.
As always our focus is on shareholder value.
<unk> is to continue to maximize our gains and transparently communicate and deliver an effective strategy to add value to all of our shareholders.
As we look towards investments in the future one area that we have seen significant opportunity and success is in sports technology companies to source capital sports.
We've made our only new investment in the fourth quarter and Compliable a software solution for all companies in the gaming industry to manage employee and company licensing as the regulatory landscape continues continues to shift rapidly.
Previously, we mentioned that we plan to dedicate $10 million to the broader broader zero capital sports portfolio.
Given the growth of sports betting market and its rapid convergence with the sports technology market, we intend to increase the debt capital dedicated to serve capital sports.
Up to 5% of the fund's assets to continue to take advantage of early and mid stage opportunity in the sports technology space.
To date, we've evaluated over 75 opportunities and deployed $2 $5 million.
And have a robust pipeline ahead that allows us to invest in exceptional founders and entrepreneurs in this space.
Okay.
In addition to sports technology, we see significant opportunity in web three point O. The latest Intertek now Internet technology that Leverages blockchain and artificial intelligence.
And the meta versus the technology behind creating experiences to bridge reality to the digital world.
2021 was undeniably a breakout year for web three O is close to 50, crypto startups raised over $100 million each and over 40 crypto unicorns were minted.
Early funds, such as true global ventures, and which Cerro capital has a $2 million investment commitment has seen tremendous returns as a result.
The evaluation of animal co brands, a portfolio company of true ventures, and over 500% increase in value since may of 2021.
And box another.
Portfolio company, a true global so exponential growth as its token value has gone up from four <unk> at the start of 2021, almost $6 by the end of the year.
As Bloomberg expect some net averse to a a market size of $800 billion by 2024, and there has been over $30 billion invested globally in web three Plano Cerro capital has begun evaluating its own investment thesis within the space in particular, we view the infrastructure technology.
Behind these trends as highly attractive as.
As consumers continue to flock to different segments of the <unk>, we have begun to engage in dialogue with <unk> technology providers, we believe may be able to benefit from the broader tailwind from this space.
Looking ahead, we believe the volatility in the public and private markets allows us opportunities to be patient and selectively and selective given the capital that we have we will continue to focus on democratizing access to the venture capital ecosystem and as always we'll maintain our key philosophy investing in great.
Companies to deliver value for our shareholders.
For your attention and with that I will hand, it over to Alison.
Thank you, Mike I would like to follow Mark's update with a more detailed review of our fourth quarter investment activity and financial results as of December 31, 2021, including dividends declared the 6% notes due 2020 and our current liquidity position.
I will review our investment activity during the fourth quarter, we invested a total of $11 million in new and follow on investments new investments during the fourth quarter include a $10 million follow on investment in the series C preferred shares of course hero and a $1 million investment in the series deemed for preferred shares of re break doing this.
Compliable through our stereo capital sports vehicles.
During the fourth quarter, we sold our remaining position in the public shares of crushed ore and began selling our public shares of newly capital partners Skillsoft as restrictions on those two holdings had been lifted.
We sold our remaining 1 million 509090 public common shares of course, there are at an average sale price of $34 35 per share for approximately $51 8 million of net proceeds resulting in a net realized gain of approximately $42 $4 million.
We sold 167755 shares of <unk> capital Partners, formerly formerly Green acreage real estate Corp for approximately $4 $7 million of net proceeds and $1 $4 million of net realized gains. We sold 18157 chaired the scope for approximately $200000 they've got proteins.
Resulting in a net realized gain of approximately $47000. In addition to sales of our unrestricted publicly traded investment. We also received approximately $2 $9 million related to the exit of our investment in 10-K, resulting in a net realized gain of approximately $2 $6 million, including approximately $400000 currently held in escrow.
During 2021, and we exited or receive proceeds from investments of over $259 million not including investment income received this resulted in realized gains of over $218 million. During 2021, we also deployed approximately $81 $7 million in new and follow on investments.
Subsequent to year end, we continue to liquidate our position in new eight capital partners selling an additional 27352 shares for approximately $800000 of net proceeds resulting in a net realized gain of approximately $200000. Additionally on January 31, 2022, our public shares of Rover became unrestricted and we sold 42000.
44 shares to date for approximately $300000 of net proceeds resulting in a net realized gain of approximately $150000.
Plan to sell the remaining shares of <unk> capital partners.
And consistent with our previously stated public investment sales strategy.
Segmented by six general investment themes, the top allocation of our investment portfolio at year end to education technology, representing approximately 42% at the investment portfolio at fair value.
Financial Technology and services was the second largest category, representing approximately 28% of the portfolio. The marketplaces category accounted for approximately 19% of our investment portfolio at approximately 6% of our portfolio is invested in social mobile companies.
Big data cloud accounted for approximately 5% of the fair value of our portfolio and sustainability accounted for less than 1% of the fair value of our portfolio as of December 31.
We're pleased to report we ended the fourth quarter and fiscal year 2021, with an NAV per share of $11 72, which is consistent with our financial reporting.
The decrease in NAV per share from $14.79 at the end of Q3 was largely driven by $2 75 in dividends declared during the fourth quarter also contributed to the decrease were <unk> <unk> per share decrease related to net investment loss and a $1 71 per share decrease in unrealized depreciation of our portfolio.
However that decrease is substantially related to the exit of investments during the quarter and almost fully offset in net realized gains.
Decreases in NAV per share were partially offset by a $1 49 per share increase attributable to net realized gains among other smaller fluctuations.
The fourth quarter stereo capital declared two dividends for a total of $2 75 per share on November <unk> 2021, and so capital is part of directors declared a dividend of $2 per share paid on December 32021 to the Companys common stockholders of record as of the close of business on November 17th 2021, the dividend was paid in cash and shares of the company.
Common stock.
On December 22021 Zero Capital's board of directors declared a dividend of 75 cents per share paid on January 14th 2022 to the company's shareholders of record as of the close of business on December 31, 2021. This dividend was paid in cash dividends declared have been categorized as that long term capital gains for tax purposes.
In total for 2021 zero capital had declared $8 per share in dividends for a total distributions in excess of $212 million.
Our 2021 dividends or categorized as nonqualified that long term capital gains for tax purposes.
As Mark mentioned subsequent to year end on March eight 2022 zero Capital's board of directors declared a dividend of 11 six per share payable on April 15, 2022 to the company's shareholders of record as of the close of business on March 25, 2022, the dividend will be paid in cash all of 2022 dividends declared to date are.
Expect it to be categorized as net long term capital gains for tax purposes.
The date of declaration and amount of any dividend, including any future dividends are subject to the sole discretion of stereo capitals part of directors the aggregate amount of dividends declared and paid by throw capital will be fully taxable to shareholders. The tax character of zero capital dividend cannot be finally determined until the close of stereo capital taxable year.
Zero capital report the actual tax characteristics of each year's dividends annually to stockholders and the IRS on form 10, 99 dead subsequent to year end.
Registered stockholders with questions regarding declared dividends may call American stock transfer at 890, 35449 shareholders, who hold their shares through a bank broker or nominee are encouraged to contact their bank broker or nominee for additional details on how their bank broker or nominee will process any.
Dividend shareholders can find a different additional information regarding the dividend in the Investor Relations section of Cerro Capitals website at Www Dot stereo cap dot com.
In December in December 2021, we issued $75 million aggregate principal amount of 6% notes due 2020.
Which bear interest at a fixed rate of 6% per year payable quarterly in arrears on March 31st June 30th September 30th December 30 of each year commencing on March 30, <unk> 2022.
Received approximately $72 8 million in proceeds from the offering net of underwriting discounts and commissions and other operating expenses. The 6% notes. Due 2020. Thanks have a maturity date of December 32020, unless previously repurchased or redeemed in accordance with their terms, we have the right to redeem the 6% notes due two.
2026 in whole or in part at any time or from time to time on or after December 32024 at a redemption price of 100% of the aggregate principal amount.
Plus accrued and unpaid interest the 6% notes due 2026 are listed for trading on the NASDAQ Global select market under the symbol <unk>.
And finally, I would like to review throw capital's current liquidity.
We ended the quarter with approximately $215 $4 million of liquid assets, including $198 4 million in cash and approximately $17 million in unrestricted public securities. It does not include approximately $27 $6 million in public securities subject to certain lockup provisions at year end our.
Our cash balance of $198 $4 million as of December 31, 2021 consisted primarily of proceeds from $75 million, 6% notes due 2026 raised in December 2021, and monetization of various portfolio positions throughout 2021 and 2020.
The approximately $17 million of unrestricted public securities held at the Bureau, and represent our shares in new way capital partners in Skillsoft valued at the December 31, 2021 closing price of $28 68.
And $9.15 respectively.
$27 $6 million of public securities subject to lock up provisions or other sales restrictions as of year end include our positions in Rover next door enjoy rent the runway.
Valued at their December 31, 2021 closing public share price less a discount for lack of marketability related to the lockup provision on <unk>.
<unk> 31, 2022, our public common shares I've ever became unrestricted we anticipate our public common shares I've enjoyed speak become unrestricted in mid April .
They rent the runway to become unrestricted in late April and our shares are next door to become unrestricted in early may as.
At December 31, 2021, there were 31 million 118556 shares of the company's common stock outstanding at present, there are 31 million 322127 shares outstanding that concludes my comments, we would like to thank you for your interest and support of stereo capital now I will turn the call over to the avid greater to start the Q&A session operator.
<unk>.
Thank you if you'd like to ask a question. Please send them by pressing star one on your telephone keypad.
You're using a speaker phone. Please make sure that your mute function is turned off today your signal to reach our equipment.
In the interest of time, please limit yourself to one question once again Thats star one to enter the queue.
And we will take our first question from Mark Palmer with BTG.
Yes, Thank you and congratulations on a really strong 2021.
Sure.
Now we've already seen weakness.
In the tech markets, particularly on the public side.
At the latter part of 2021, and then heading into 2022.
Now as you said during your prepared remarks, you know we have the addition of <unk>.
Political.
Driven volatility.
Can you talk a little bit about what you're seeing in the private markets relative to the public markets I know as <unk> said before there has been a gap there.
How does that gap shrunk to any extent has there been any impact.
From the ongoing weakness in the public market and all the other.
Exogenous factors.
Geopolitical inflation et cetera.
That's great question, Mark and first of all thank you.
For your ongoing support and obviously your insights in.
All things web three O of meta versus greatly greatly greatly appreciate it.
So I wanted to say thank you.
In respect to your question.
As in any markets you have this sort of disconnect of what.
People think something is worth because it was worth that at some point in time and what folks are willing to pay for it and we started to see that as we were coming through the end of Q4 and it's continued in Q1, we have seen and I think this is pretty well documented.
Is term sheets are being restructured term sheets are being pulled.
Rounds, where companies thought they would do another round at a higher value theyre now coming as extensions of prior rounds or they are flipping to some sort of convertible securities. So youre seeing.
Broadly and Theres, obviously exceptions for what would be considered maybe outstanding companies or highly coveted companies, but broadly you're seeing that sort of weakening in the marketplace, which is a.
A bit of price concessions by issuers and.
And changing of the types of securities and motor in order to try to maintain prior valuations. Thank you very much.
Yeah.
Thank you we'll take our next question from Kevin <unk> with JMP Securities.
Hi, Good afternoon, Mark and thank you for taking my question.
In your prepared remarks, you talked about a strong pipeline of investment opportunities can you talk a bit more about how you think about deploying capital in the current environment risk often be rating do you look at it as a potential opportunity to lean into investment activity a bit more at more attractive valuations. Just just curious if you could talk about.
The opportunities that Youre seeing right now.
Sure and thank you Kevin in your team also being so supportive of us.
Look I mean, we've been pretty clear over the last.
Over the last period.
Period of time, probably since sometime in late Q3, when we started talking to.
Analysts and investors as well as.
Yes your calls that.
We felt the markets were getting expensive.
And we clearly pulled back we pulled back pulled back through Q4 and the early part of this year.
We are here to invest investors' capital, we're not here to have a big cash balance, but we're here to be selective and judicious we are seeing.
At least the same amount.
Quantum of names come through our system.
Through our process.
But we're still not seeing the.
Valuation give up.
On a lot of names that make some of these compelling but we are very very active in the marketplace.
<unk> would naturally start to lean in.
Is valuation started to break and come back more in line with sort of where the public is right now and maybe a little less frothy.
So thank you.
Thank you we'll take our next question from Alex Paris with Barrington Research.
Hi, guys. Thanks for taking my question and my congratulations as well for the strong 2021.
I get it and I appreciate your cautious view with regard to new investments in this environment.
Just wondering what your thoughts are with regard to share repurchases.
Putting some of that money to work and by the New York stock below NAV.
Particularly since during the fourth quarter the board extended the program.
The term of the program to October or $40 million.
Yeah.
Alex and again and thank you for your ongoing support for us.
You know as well enough to know that.
We're very hyper focused on shareholder value, creating shareholder value. We've we've we've used a buyback and even a Dutch tender offer in the past.
We will.
If the.
The disconnect on our share price versus our NAV.
<unk> starts to be be meaningful we will of course deploy we always have in the past and we will continue to utilize a buyback is a way to.
For accretion for our shareholders and help to create shareholder value. So we clearly had that a tool is a tool in our toolbox, which we have used for.
For years, and we will do that again.
As the opportunity presents itself. So thank you.
Thank you we'll take our next question from Lou <unk> with Morgan Stanley .
Hey, Mark.
Quick question of course hero could you give us some more color I mean, obviously, they just raised another round.
Recently.
What their thoughts are in terms of kind of monetization is that a.
Is that a 2022 events 2023 event I mean sauce.
Sure.
Thanks.
Thank you also for your ongoing support for us.
Look of course hero is a spectacular company. The management is is really strong there.
The board of directors is very focused on helping them to drive.
The value that they're trying to create.
I think they are very thoughtful of.
When how they want to proceed.
Obviously, they raised an awful lot of capital at the end of last year. It puts them almost at the top of the pile with the ability to use cash to make acquisitions to use the currency to make acquisitions.
So.
I don't know their timetable to.
Create a monetization event, but it certainly now gotten to the scale.
At the last round and with their capital and with their acquisition strategy.
Two to consider alternatives for themselves.
In the coming period of time.
Thank you.
Thank you and that does conclude today's question and answer session I would like to turn the conference back over to management for additional or closing remarks.
Well. Thank all of you for spending the time with US. This afternoon, it's graciously greatly appreciated.
We did have a very very strong 2021, but it's 2022 right now and we have our work cut out for us to continue to drive share.
Shareholder value and returns.
We're all working diligently we do have the capital to deploy in the deal flow to deploy it against and we look forward to speaking to you.
After our Q1 earnings release, so thank you very much greatly appreciate it.
Yeah.
Thank you that does conclude today's conference. We thank you for your participation and you may now disconnect.
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