A Fresh IPO Take: The New Pre-IPO Fund From Keating (KIPO, SZYM, NPTN, GSVC, LNKD, TINY)

June 28, 2011 by Jon C. Ogg

Whether or not initial public offerings are performing properly in the after-market is one thing, but the game that investors are trying to win now is in securing pre-IPO shares of companies which are going to come public or which are likely to come public soon.  A new business development company, which will trade in a closed-end fund structure, called Keating Capital aims to invest in companies that fit right into the pre-IPO sweet spot.  The structure is a publicly reporting company now with the SEC and it should be a public company that trades under the very appropriate ticker of “KIPO” on NASDAQ late this year.

24/7 Wall St. was given a chance to ask Tim Keating some questions in an interview about Keating Capital, as well as regarding industry trends and some recent deals that have been seen.  He has roughly 26 years of history in the capital markets and investing and his Denver, Colorado-based Keating Investments was founded in 1997.  Its site can be accessed here.

Keating has raised roughly $53 million through the end of May and that figure is expected to be roughly $70 to $75 million upon completion.  It is also expected to have about 3,500 shareholders by the time it is said and done.  Keating’s specialty is making pre-IPO investments in innovative and high growth private companies that are committed to becoming public within roughly eighteen months of the investment coming about.  Each investment is expected to be about 5% of the fund’s capital, implying up to $3 million to $4 million per investment.

The firm has already enjoyed some success even before being truly public on the markets.  Two of its investments have already made it to come public: Solazyme, Inc. (NASDAQ: SZYM) is a renewable oil and green bioproducts company; and  NeoPhotonics Corporation (NYSE: NPTN) a developer and manufacturer of photonic integrated circuit based components for use in telecommunications networks.  The group has also recently been involved in several other capital transactions and investments:

  • Xtime, a service provider of Web scheduling and CRM solutions for automotive service departments;
  • BrightSource, a developer solar energy generating facilities for utility and industrial companies;
  • MBA Polymers, a company engaged in plastics recycling;
  • Harvest Power which acquires and operates organic waste facilities.

We asked Tim Keating about this week’s news that GSV Capital Corporation (NASDAQ: GSVC) had announced a tentative transaction to buy shares in Facebook that reportedly assigned a $70 billion valuation.  On this front Keating noted the successes of Michael Moe, GSV’s chairman and CEO.  As far as the valuation, Keating noted that the Facebook valuation is dependent upon its real financial situation and we all know that the internal finances of that social media giant are under lock and key.

As far as the valuation for LinkedIn Corporation (NYSE: LNKD), Tim Keating noted that limited float and high valuation multiples seem sustainable “only if that dramatic growth can remain in place.”

We also asked about the current great opportunities in pre-IPO investing today, and Tim Keating had two areas he sees great opportunity in.  The first sector was companies tied to winning from “The Cloud” in the world of remote data and cloud computing.  Surprisingly, his second arena of excitement was still in Cleantech.  While Cleantech and “green investing” saw great growth, we also know that many of these valuations have come crashing down to earth since the oil bubble peak in 2008 and the great recession which followed in short order. In fact, we have now even seen a share buyback announced in the solar sector.

What makes Keating Capital interesting is that, while it offers a fund structure for diversification, it also plans to return capital gains made after post-IPO shares have been sold by the company.  It will distribute on average about 80% of the capital gains of each company as dividends.  It gets to keep about 20% of the gains as an incentive fee, but the original capital will be maintained inside the fund so that new investment opportunities can be funded.

Business development companies, or BDCs, are not a flash in the pan.  Think of it as public venture capital and private equity that trades in a closed-end mutual fund structure.  There are roughly 30 such companies.  In fact, another BDC is Harris & Harris Group, Inc. (NASDAQ: TINY).  It has a market cap of close to $160 million and it also gained in value as it was a pre-IPO investor in Solazyme, Inc. (NASDAQ: SZYM) just like Keating.

The obvious issue that could be a challenge for new investors to digest is that the IPO markets can become locked up from time to time.  This new fund will generally tend to hold companies which are still growing and still performing to expectations if the only real hurdle is the current market conditions.  The goal there is obvious: that is called survival in hard times as well thriving in good times.

Tim Keating noted about the ongoing and changing landscape of the IPO market, “However fragile the IPO market has been for five out of the past 10 years, we nonetheless remain avid proponents of going public and being public for the right types of companies.  The existing public capital formation process has worked marvelously for the past 50 years and has facilitated much of the wealth creation in this country.  Further, we believe that the recent pickup in IPO activity will beget more IPOs.  Keating Capital’s role as an access vehicle for individual investors to participate in pre-IPO investments is an important part of this overall process.”

For individual investors to get pre-IPO shares, the most likely shot today is going to be through private exchanges like SecondMarket and others.  The problem is that share sales there are generally from prior investors, employees, contractors, or other entities who are not sending that money to the underlying companies.  The true value of the transactions can also leave more than a few questions. For instance, is Facebook worth $70 billion, or is it worth $100 billion?  It depends upon whom you ask but market conditions or a change in the business climate or the rise of a competing interest could lower Facebook’s value significantly.

If all goes as planned, Keating Capital offers investors a soon-to-be public investment vehicle which offers a better chance of getting a diverse set of pre-IPO companies, an ability to profit with a set of guidelines, and an ability to keep that strategy going for years and years into the future.