Buyers 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 remainder down when it falls. And, too, chaos within the nationwide authorities is making them anxious if not but able to abandon their lovelies. Curiosity is rising find methods to e-book positive factors unbiased of the inventory market. One manifestation of that’s the insane progress in economically inefficient buffered funds, and one other is the rising curiosity in securing entry to non-public fairness. “Non-public fairness” describes the extensive world of firms whose shares are not out there to the general public; they’re held by insiders and choose teams of outsiders. Reportedly, personal fairness investments have returned about 5% extra per yr, over the 21st century, than have public inventory investments (CAIA Affiliation, “Lengthy-Time period Non-public Fairness Efficiency: 2000 to 2023,” 4/23/2024). As with the chance to put money into 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 vital 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 provide some trace of the undiscussed dangers.
The Golden Period: Firsthand’s Phenomenal Rise within the Nineteen Nineties
Firsthand Expertise Worth Fund started its journey in 1994 when Kevin Landis, who would develop into considered one of Wall Avenue’s most celebrated know-how buyers through 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 targeted on know-how investments and shortly turned a standout performer within the burgeoning tech sector.
In the course of the late Nineteen Nineties, the fund delivered extraordinary outcomes, with returns of 59.23% yearly from 1994-1999. This efficiency culminated in a shocking 190% acquire in 1999 alone, on the top of the tech bubble. With these spectacular returns, the fund’s property below administration swelled to over $4 billion, and its NAV soared past $130 per share. Kevin Landis turned a media darling and the “go-to” skilled for know-how funding commentary, showing commonly 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 below $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.
Thus far, the fund was, at worst, simply one other completely unusual tech catastrophe, like dozens of its friends. Human error, human vanity, 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 Celebration (1969)
‘To err is human, to actually 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 unusual disasters. To actually screw issues up, add personal fairness.
Transformation to a BDC: The 2011 Conversion
Going through persevering with challenges with the open-end mutual fund construction, the Board accepted 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 targeted totally on investing in personal corporations. Just like the ETFs we wrote about in “Liquid Guarantees, Illiquid Actuality” (March 2025), the magic was going to be supplied by personal fairness.
Whereas our major focus is to put money into illiquid personal know-how and cleantech corporations, we may additionally put money into micro-cap publicly traded corporations … We count on to be risk-seeking quite than risk-averse in our funding strategy. We count on to make speculative enterprise capital investments with restricted marketability and a better threat of funding loss than much less speculative investments. We’re not restricted by the diversification necessities relevant to a regulated funding firm … (Firsthand Expertise Worth Fund, Inc., Type 10-Ok/A, FY 2023)
Right here’s personal capital in 119 phrases:
You’re a tiny firm with a cool product. You’re new at this. You wish to develop however you don’t have the money or experience to drag it off, and so that you invite in a White Knight. Good, 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 progress, 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 “prone to intestine shareholders like fish” and suggesting that “they’d be higher off with a liquidation, which Firsthand has carried out to a few of its different depressing funds” (“Chuck Jaffe: Don’t expertise this unhealthy deal ‘Firsthand,’” Seattle Instances, 8/10/2010). Two notes there: (1) that was the nicest factor Chuck stated 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 Transient Illusory Revival
In October 2011, SVVC introduced a $1.6 million funding in Fb by a non-public transaction. As Fb ready for its extremely anticipated IPO, the funding represented a uncommon alternative for public market buyers to realize publicity to the pre-IPO social media big.
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 an enormous 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 measurement. You’ll suppose that investing in a FAANG when it was nonetheless a Child Tooth could be a positive street to riches. Not a lot. The Fb-driven euphoria proved short-lived. The social media big’s IPO was extensively considered disappointing, and SVVC suffered as its largest holding underperformed expectations.
The choice to guess the ranch on personal 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 consultants are fairly positive that we might 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 diminished 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 personal fairness buyers: personal fairness buyers are a famously predatory bunch with a status for trying to intestine their acquisitions as shortly and completely as attainable. Eileen O’Grady, a researcher on the Non-public Fairness Stakeholder Venture, studies: “A evaluate by the Non-public Fairness Stakeholder Venture has discovered that personal fairness corporations performed a task in eleven of the 17 (65%) largest US company bankruptcies through the first six months of 2024 (bankruptcies with liabilities of $1 billion or better on the time of submitting).” Should you’re curious about strengthening an organization and your colleagues are curious about looting it, you’re going to have an issue.
Administration choices throughout this era got here below intense scrutiny. As an example, 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 choice 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 Could 2021, shareholders have 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 frequent 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 web 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 an excellent 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 possibly can’t liquidate except you possibly can convert your illiquid positions into money. The fund retains limping together with a mixture 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 gives a number of cautionary classes for buyers. It demonstrates how shortly funding fortunes can reverse, significantly for funds closely concentrated in unstable 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 personal firm holdings – exactly the considerations that prompted regulatory limitations on illiquid investments in publicly traded funds designed to guard “common” buyers from refined funding dangers they won’t absolutely perceive.
