Traders are more and more skittish. They’re warned incessantly that the highest of the US fairness market is feverishly overpriced and would possibly deliver the remaining down when it falls. And, too, chaos within the nationwide authorities is making them apprehensive if not but able to abandon their lovelies. Curiosity is rising find methods to e book good points unbiased of the inventory market. One manifestation of that’s the insane development in economically inefficient buffered funds, and one other is the rising curiosity in securing entry to personal fairness. “Personal fairness” describes the vast world of companies whose shares are not out there to the general public; they’re held by insiders and choose teams of outsiders. Reportedly, non-public fairness investments have returned about 5% extra per yr, over the 21st century, than have public inventory investments (CAIA Affiliation, “Lengthy-Time period Personal Fairness Efficiency: 2000 to 2023,” 4/23/2024). As with the chance to spend money on hedge funds, the promise is simply too nice to disregard.
Our recommendation: ignore it.
The story of Firsthand Expertise Worth Fund (TVFQX reincarnated as SVVC) represents one of the dramatic cycles of increase and bust within the funding fund world, reworking from a high-flying know-how mutual fund with billions in property to a shell of its former self with minimal property and a share value of mere pennies. This complete account paperwork its meteoric rise, subsequent struggles as a non-public fairness investor, and supreme collapse. Their struggles supply some trace of the undiscussed dangers.
The Golden Period: Firsthand’s Phenomenal Rise within the Nineties
Firsthand Expertise Worth Fund started its journey in 1994 when Kevin Landis, who would change into one in all Wall Avenue’s most celebrated know-how buyers in the course of the dot-com increase, and Ken Kam based Firsthand Capital Administration. Their edge was that, as profitable entrepreneurs in tech and biotech, they’d an insider’s firsthand understanding. The fund began as an open-end mutual fund centered on know-how investments and shortly grew to become a standout performer within the burgeoning tech sector.
Throughout the late Nineties, the fund delivered extraordinary outcomes, with returns of 59.23% yearly from 1994-1999. This efficiency culminated in a surprising 190% achieve in 1999 alone, on the peak of the tech bubble. With these spectacular returns, the fund’s property underneath administration swelled to over $4 billion, and its NAV soared past $130 per share. Kevin Landis grew to become a media darling and the “go-to” skilled for know-how funding commentary, showing frequently on monetary information networks.
The Bursting Bubble: 2000-2010
When the tech bubble burst in 2000, Firsthand Expertise Worth Fund suffered catastrophic losses together with most technology-focused investments. Over the subsequent three years, the fund’s NAV plummeted by 78%, and its property shrank dramatically to lower than $500 million. The downward spiral continued all through the last decade, with property dwindling to underneath $150 million by mid-2010.
This era represented a basic problem to the fund’s funding thesis and administration strategy. Like many previously high-flying tech funds of the period, Firsthand struggled to adapt to the brand new market actuality after the dot-com bubble burst.
Up to now, the fund was, at worst, simply one other completely atypical tech catastrophe, like dozens of its friends. Human error, human conceitedness, the bubble pops.
I do know there’s a proverb that claims, ‘To err is human’ however a human error is nothing to what a pc can do if it tries.” Agatha Christie, Hallowe’en Social gathering (1969)
‘To err is human, to essentially foul issues up requires a pc’. Senator Soaper, the comedian creation of Invoice Vaughan, “Senator Soaper says” (1969)
Investing in publicly traded securities results in completely atypical disasters. To actually screw issues up, add non-public fairness.
Transformation to a BDC: The 2011 Conversion
Dealing with persevering with challenges with the open-end mutual fund construction, the Board authorised a major structural change in 2010-2011. On April 18, 2011, Firsthand Expertise Worth Fund transformed from an open-end mutual fund to a enterprise improvement firm (BDC), structured as a closed-end fund centered totally on investing in non-public corporations. Just like the ETFs we wrote about in “Liquid Guarantees, Illiquid Actuality” (March 2025), the magic was going to be supplied by non-public fairness.
Whereas our main focus is to spend money on illiquid non-public know-how and cleantech corporations, we can also spend money on micro-cap publicly traded corporations … We count on to be risk-seeking somewhat than risk-averse in our funding strategy. We count on to make speculative enterprise capital investments with restricted marketability and a better danger of funding loss than much less speculative investments. We aren’t restricted by the diversification necessities relevant to a regulated funding firm … (Firsthand Expertise Worth Fund, Inc., Type 10-Okay/A, FY 2023)
Right here’s non-public capital in 119 phrases:
You’re a tiny firm with a cool product. You’re new at this. You need to develop however you don’t have the money or experience to tug it off, and so that you invite in a White Knight. Sensible, skilled entrepreneurs with a bucket of money who promise you’ll be The Subsequent Google. You promote a lot or all your firm to them for a value they inform you is greater than truthful. They promptly begin fixing you. The unstated half is that they may do to your organization no matter it takes to maximise their revenue, which would possibly be rigorously nurturing its development, slapping on a coat of paint and flipping the corporate, or plundering it and submitting for chapter.
This conversion proved controversial from the beginning. Monetary columnist Chuck Jaffe of MarketWatch issued a stark warning concerning the conversion, calling it a transfer “more likely to intestine shareholders like fish” and suggesting that “they’d be higher off with a liquidation, which Firsthand has accomplished to a few of its different depressing funds” (“Chuck Jaffe: Don’t expertise this dangerous deal ‘Firsthand,’” Seattle Instances, 8/10/2010). Two notes there: (1) that was the nicest factor Chuck mentioned concerning the supervisor in the middle of this 2010 article and (2) it was cited by Tech Worth’s largest shareholder in a 2013 submitting with the SEC. Regardless of these warnings, the conversion proceeded, and SVVC started its new life as a BDC with an NAV of $94 million, together with $75 million in money.
The Fb Impact: A Temporary Illusory Revival
In October 2011, SVVC introduced a $1.6 million funding in Fb by way of a non-public transaction. As Fb ready for its extremely anticipated IPO, the funding represented a uncommon alternative for public market buyers to achieve publicity to the pre-IPO social media large.
By April 2012, Fb represented 26% of SVVC’s property, and investor pleasure pushed the fund’s share value to greater than $45 per share, representing a large premium over its final reported NAV of $24.56. Capitalizing on this enthusiasm, SVVC carried out a secondary providing, issuing 4.4 million shares at $27 per share, greater than doubling the fund’s dimension. You’d suppose that investing in a FAANG when it was nonetheless a Child Tooth can be a certain street to riches. Not a lot. The Fb-driven euphoria proved short-lived. The social media large’s IPO was broadly considered disappointing, and SVVC suffered as its largest holding underperformed expectations.
The choice to guess the ranch on non-public fairness got here with huge and predictable dangers:
- Valuation uncertainty, the place the nominal worth of a place is untested out there. On the base you’re depending on “welllll … our specialists are fairly certain that we may sometime promote this to somebody for one thing like …. However when? Don’t know.”
- Illiquidity, particularly for tiny corporations with untested fashions in durations of …
- Market volatility, which was rampant.
- Rate of interest uncertainty, the place rising charges and concern of a recession decreased the provision of credit score for merger & acquisition actions, and restricted the fund’s capacity to money out of positions and transfer on.
- Potential misalignment with different non-public fairness buyers: non-public fairness buyers are a famously predatory bunch with a repute for seeking to intestine their acquisitions as shortly and completely as potential. Eileen O’Grady, a researcher on the Personal Fairness Stakeholder Undertaking, reviews: “A evaluate by the Personal Fairness Stakeholder Undertaking has discovered that personal fairness companies performed a task in eleven of the 17 (65%) largest US company bankruptcies in the course of the first six months of 2024 (bankruptcies with liabilities of $1 billion or better on the time of submitting).” For those who’re fascinated by strengthening an organization and your colleagues are fascinated by looting it, you’re going to have an issue.
Administration choices throughout this era got here underneath intense scrutiny. As an illustration, the fund handed on shopping for SolarCity shares at $8 in its December IPO, regardless of having beforehand valued the corporate’s restricted shares at $16 – a call that proved pricey as SolarCity’s shares subsequently traded at round $20.
Shareholder Activism and Liquidation Makes an attempt
By 2020, dissatisfied shareholders started organizing. A gaggle known as “Save Firsthand Expertise Shareholders” proposed “ceasing new investments and pursuing an orderly liquidation or termination of the fund,” noting that SVVC’s NAV had fallen 60% from its latest excessive.
In Might 2021, shareholders had been urged to vote in favor of terminating the funding advisory and administration agreements between SVVC and Firsthand Capital Administration. A vocal shareholder, Rawleigh Ralls, who owned roughly 3.7% of SVVC widespread inventory, identified that Firsthand Capital Administration had collected $33.8 million in charges over an almost ten-year interval throughout which the SVVC inventory value declined by 78% (Globe NewsWire, 5/7/21).
The Remaining Collapse
The fund’s decline accelerated dramatically lately. As of December 31, 2022, SVVC reported internet property of roughly $30.6 million after which, a yr later, $1.3 million, a staggering 95.8% decline in a single yr. The market worth tells a fair bleaker story, with SVVC buying and selling at simply $0.06 per share in February 2025, giving the fund a minuscule market capitalization of simply $439,582. Administration delisted from the NASDAQ, then tried to delist as a BDC and liquidate the fund in October 2023. They seem to have failed maybe as a result of you’ll be able to’t liquidate except you’ll be able to convert your illiquid positions into money. The fund retains limping together with a mix of optimistic rhetoric (about microcap and personal fairness alternatives) and fatalism (“All through the quarter, the Fund continued its efforts to handle its portfolio prudently, together with working with its portfolio corporations and their administration groups to hunt to boost efficiency and uncover potential exit alternatives,” submitting on 11/14/24).
Conclusion: Classes from a Fund’s Collapse
The story of Firsthand Expertise Worth Fund affords a number of cautionary classes for buyers. It demonstrates how shortly funding fortunes can reverse, significantly for funds closely concentrated in risky sectors. It additionally highlights the potential misalignment between administration incentives and shareholder pursuits, as Firsthand Capital Administration continued amassing substantial charges even because the fund’s worth evaporated.
Maybe most significantly, SVVC’s transformation from a high-flying open-end mutual fund to a penny inventory illustrates the profound dangers of illiquid investments and the challenges of valuing non-public firm holdings – exactly the issues that prompted regulatory limitations on illiquid investments in publicly traded funds designed to guard “common” buyers from subtle funding dangers they won’t absolutely perceive.
