A Good Case for Keating Capital KIPO

We’ve known Keating Capital (KIPO) for at least two years and hold Tim Keating in high regard.  Like many potential investors we have been bamboozled by “business development companies” in terms of growth and valuation.

Look no further than this exhibit to note the spread that has opened up between KIPO NAV and the share price:


Of course these companies are financial in some ways and have a calculated net present value (NPV) but some, like Keating and also Harris and Harris (TINY), invest in emerging and high growth companies. The value of their investments is growing and will fuel increases in NPV over time. Yet these companies tend to trade very close to their NPV, often at a discount. There is little if any “future value” ascribed to them. (There are exceptions to this rule as when GSV Capital (GSVC) was bid up on the Facebook (FB) IPO hype.)

We revisited KIPO the other day because we were looking into what turned out to be one of their portfolio names, Tremor Video (TRMR). We’re not sure if TRMR is going to mount a big recovery from here or not but once we started looking at the KIPO portfolio some other names boosted our interest. For example TrueCar (5.1% of KIPO net assets) has filed for an IPO. We’ve completed research on the company (link) and thing this one will add significant value to KIPO NAV as a public company.

There are other as well like Metabolon in medical diagnostics that we know well and think have a strong chance of succeeding. BrightSource Energy failed to get their IPO done but we still think that in some locations their approach to solar can be adopted. Keating has a number of other positions that touch online commerce, gaming, sustainable energy, and software.

Of course there are losers and a few very unproven companies. And as far as we can tell with respect to TRMR Keating is under water with a cost basis of  $6.67/share. However in aggregate it looks like more winners than losers and a foundation for expanding NAV and/or increased dividend distribution in future quarters.

Speaking of distributions the company has a policy to distribute gains as evenly as possible. For 2014 this means $0.10/share for the first three quarters and a final dividend based on actual results. If we assume another $0.10 for December that would be a yield of almost 7%.

The real kicker here is that NAV as of December 31st was $7.65/share and shares of KIPO are trading at $5.94.

So rather than play a potential turn around in TRMR (or MM for that matter) it probably makes more sense to take advantage of the discount to NAV that KIPO offers and accept the dividend and a potential increase in NAV as icing on the cake.

To sum up we see a stock trading at a 33% discount to NAV, with a good dividend policy and yield, run by someone we know is a very smart and capable CEO, with a portfolio of investments that we think will appreciate in the next 12 months.

KIPO may not offer the same upside as a successful turnaround at a company like TRMR but on a risk-adjusted basis is probably a better investment for many.

Big Data Update – More semantic, faster clients, need for creativity

In late March we spent two days (as usual) digging around the “big data” space with a few dozen companies and speakers at the annual GigaOM Structure Data event in NYC.

There were some encouraging trends this year, a few interesting side notes and at least one emerging question which wonders if we are missing a larger point about getting value out of all this data by maniacally storing and “processing” it. As one speaker said it “the limited business value stems from a lack of creativity and vision in understanding how to *use* data to accomplish *new and different* things.”

Our own nagging concern is that many applications require a more event-driven and real-time approach to gathering and leveraging data versus storing, staging, integrating and finally analyzing. Widespread adoption of technologies like Hadoop provokes the old saw – “when you are carrying a hammer everything looks like a nail” approach to projects.

Here are the main takeaways from the event for me:

  • There is a **concerted movement “up the stack” to deal better with semantics** and higher-order data like social connections and networks. Vendors touting speeds and feed are still around but more companies see that as the commodity that it is. Many of the companies plying this part of the data stack are private but both **Qlik (QLIK $26.16)** and recent-IPO **Varonis (VRNS $33.39)** are two companies at least touching some of the right parts of the market.
  • Data scientists are still in short supply and running projects at scale is still hard. But the **bigger governor on growth may be leaders who really “get data” as their primary method of developing business**. For example private companies like Uber and AirBnB are clearly leveraging data in a profound way relative to their competition. Another recently-public name, **Zulily (ZU $51.43)**, has implemented personalization at a whole new level by customizing web and email content dynamically at the individual user level. We expect everyone will want or need to do this soon.
  • The **need for speed is shifting from server-based processing to the client side**. It might *sound* obvious but this one is big. Your iPhone and Galaxy already have a lot of processing power, wait another few years and imagine what you’ll be carrying around. One private company, New Relic, is generalizing their application analytics to a more full stack offering and adding more “intelligence” to the feature set. It calls into question how modern the hyped **Splunk (SPLK $66.36)** platform is and whether or not they deserve their $8B market value (on $405M in estimated revenues for 2014.)
  • Subsegments like visualization from leaders like **Tableau Software (DATA $71.81)** continue to get strong interest but we remain convinced that few if any really solve the collaboration challenge in working with data and decision making. There’s still **too much “wizard” mentality in the use cases**.

Our confidence in the market needing much better “small data” tools has gone up further after this event. We know from our own recent development efforts that very valuable intelligence is available with relatively simple but highly integrative processing methods. In talking about it with others we definitely saw lights go on but all of them said they’d be unable to pursue it because it was too far from their core product which aimed more at size, scale and diversity of data.

Some of the infrastructure needed to enable these new applications is forming from a variety of slightly unlikely sources including cloud storage vendors like Dropbox, simple automation platforms like Zapier, non-relational information storage tools like MongoDB and alternative cloud-based development frameworks like Meteor.

Included here is a table showing a large portion of the “big data” ecosystem with some figures on revenues, growth and valuation.


What We are Working On

March is a busy month so far. We’ve got three different events in the process of being written up. These include one on information security, one on big data (GigaOM) and one that focuses more generally on technology and social change.

Two areas we’ve been working on including the “next wave in retail” and the “programmable web” have been in the news of late and we expect these themes to be very topical for the next 12 to 36 months. It always feels like a brave new world in the emerging technology space.

In addition to our active public investing we have started to make private investments again after a hiatus. Our direct investing is very selective due to limited capital and management bandwidth. As an experiment we are participating in some of these new “syndicates” of angel investing to understand their potential for returns and diversification for smaller investors.

Lastly we have also started developing some actual software technology that should allow us (and ultimately our clients) to have a better handle on emerging technology companies for improved decision making that tends to lead to higher returns. This work has been on the “drawing board” since 2012 and will probably take at least the rest of 2014 for there to be any kind of prototype. There’s a strong development plan behind the initial work if we can get it done and it is successful.

Reshaping SoundView for the Online World

After a busy 10 years or so we have done lots of work with great clients we have continued to evolve our business since we acquired the old SoundView Trademark for use in research, analysis and investing a few years ago.

Despite all the fervor around the JOBS act and what it might mean for “boutique” investment banks and brokers, the challenges of the regular way securities business remain firmly in place. After being approached with capital we took one last in-depth look at this model before deciding to abandon it forever and stop paying attention to the throes of this large but depressing reality in our financial services economy.

We have a much more fun and fulfilling mission to complete!