An ideal portfolio contains a nice blend of mature, established
companies and younger, fast-growing businesses. To round out your
exposure, why not alsoload up on young upstart companies that are
still not ready to go public? When they do, the
initial public offering (IPO)
can often deliver an embarrassment of riches to investors.
But how can individual investors own
of companies that aren't yet publicly traded? Well, quite easily --
simply by owning shares of publicly-traded firms that act as
Venture Capitalists (VCs). A pair of VC-like firms has established
impressive track records, and their current roster of private
investments could possess major upside when the
turns up and the
market is flourishing.
A focus on tiny technology is why New York-based
Harris & Harris (Nasdaq:
chose its ticker symbol: it focuses investments on companies
working with advanced miniaturization technologies, such as
nanotechnology. The premise behind nanotech was simple. Scientists
had found ways to develop ultra-tiny particles that could be used
in a range of biotech, industrial and cosmetic applications. We're
talking smaller than "micro." Smaller than "milli." You have to go
down below the width of a human hair, or one millionth of a meter
to get a sense of just how tiny nano-particles are.
A decade ago, this investment firm generated ample buzz, and its
shares soared past $25. These days, the stock trades for around $5.
As it turns out, few companies have succeeded in commercializing
the technology. It didn't help that the investment firm kept
finding new opportunities throughout the last decade, but saw only
one holding go public.
But the timing may finally be good. Harris & Harris currently
owns stakes in 33 businesses (half of which currently generate
revenue), and the process of bringing them public or selling them
finally appears underway. A pair of holdings,
recently completed IPOs. Another holding, Biovex, was recently
, while Innovalight was bought by
. [My colleague Ryan Fuhrmann recently wrote an excellent bullish
piece for DuPont.
Go here to see what he had to say...
In recent quarters, a number of Harris & Harris' still-private
holdings have made considerable progress. (Visit the home pages of
companies such as Nanosys, Bridgelux, Ensemble, Cambrios Technology
and Laser Light Engines for company-specific progress reports.) As
a sign of that overall progress,
Net Asset Value
) has been steadily rising recently as its holdings get upward
valuation revisions. (Look for an update when quarterly results are
released on Aug. 12.)
Valuing the company's holdings is more art than science. All assets
must be valued at "
" as determined by the Board of Directors' Valuation Committee,
which is comprised of independent directors. Every quarter, the
committee issues an updated NAV for the whole firm. In the past 10
years, Harris & Harris has traded for an average of twice its
NAV (with a move up to five times NAV at the height of the nanotech
bubble). Nowadays, shares can be had for just 1.1 times NAV of
$4.73. Analysts at Needham figure shares deserve to trade at 1.7
times NAV, or $8 a share, more than 50% above current levels.
Safeguard Scientific (NYSE:
This Massachusetts-based investment firm was a highflyer during the
dot-com boom, with shares briefly surpassing $400, thanks to stakes
in some companies that pulled off richly-valued IPOs. Many of the
dot-com holdings eventually flamed out, and shares skidded to
around $2 at the bottom of the 2008/2009 economic crisis.
These days, Safeguard is looking a lot healthier as its portfolio
of companies start to make real progress. Unlike Harris &
Harris, Safeguard Scientific has now chosen to cast a wider net,
seeking investments in a range of technology and biotech niches.
The firm seeks business models that are on the cusp -- or already
experiencing -- rapid sales growth. On an aggregate basis, the
collection of privately-held firms boosted sales 30% in the second
quarter from year-ago levels.
The track record is enviable. In the past five years, management
has invested roughly $270 million in its portfolio of investments,
while also harvesting $600 million in profits. Asset sales have
(which now sports $263 million in unrestricted cash), enabling the
company to keep investing in the next wave of young start-ups.
(Management looks at more than 1,000 potential deals every year.)
A recent flurry of
sales allowed Safeguard Scientific to book nearly $6 a share in
profits in the second quarter. This may be it for a while, as few
late-stage holdings remain to make imminent exits, but much of the
portfolio looks set to ripen in 2012 and 2013.
Unlike Harris & Harris, Safeguard Scientific doesn't apply a
rigorous updated assessment of the value of its holdings. An
investment in the stock is largely predicated on trust that
management can continue to secure strong returns on its
investments. If recent history is any guide, that's a good bet to
Action to Take -->
As is the case with traditional venture capitalists, these business
models are most effective when the IPO market is strong, or large
established companies look to acquire younger upstarts. Without
that backdrop, shares of these firms could languish for a stretch,
as has been the case in the past. So these are best viewed as
long-term holdings and not short-term trades.
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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