SSSS - SuRo Capital Bets On Greater Diversification As Discount To NAV Remains Sticky

2023-10-20 17:59:42 ET

Summary

• SuRo Capital Corp is currently trading at a roughly 52% discount to the upper range of its guided NAV for its third quarter.
• The BDC is chasing diversification against a turbulent economic backdrop.
• Higher for longer will pose a headwind to venture equity valuations.

SuRo Capital Corp ( SSSS ) is an equity-only business development company with a portfolio built from high-growth technology startups across a range of investment themes from EdTech to Fintech and marketplaces. Whilst the BDC occasionally pays out dividends, its current return profile will be driven by the upward appraisal of its equity positions and a tightening of a 52% discount to the upper range of net asset value guidance for its fiscal 2023 third-quarter of $8.65 per share . The BDC expects NAV per share for the third quarter to not be lower than $8.15 per share. SuRo is essentially a quasi-publicly traded venture fund whose portfolio has been disrupted by a macroeconomic backdrop defined by high inflation and a Fed fund's rate currently sitting at a more than two-decade high. Higher for longer likely means a continuation of near-term underperformance and the stickiness of the current discount.

I've always been muted on SuRo with BDC investors able to gain venture exposure through venture debt-focused BDCs like TriplePoint Venture Growth ( TPVG ) or Runway Growth Finance ( RWAY ) which currently pay dividends of 17% and 14% respectively. SuRo last paid a dividend of 11 cents per share in the first quarter of 2022 with these suspended since then. As a business development company, SuRo is required to distribute 90% of its income to shareholders to be exempt from federal taxes.

Hence, this means a variable dividend policy that's driven by the oscillations in value and subsequent exits across its equity portfolio. As to whether SuRo is now a cautious buy on the back of the discount will depend on the outlook of growth for its most material investment positions. We truly live in the age of the macro with stock volatility, for the most part, this year primarily driven by external factors. Whether inflation, the banking crisis, the Israel-Hamas war, the Russia-Ukraine war, or a government shutdown, 2023 has brought one of the most marked periods of instability in decades.

The Portfolio Gets More Diversified

Against what's a growing specter of a 2024 US recession and broader macro risks, SuRo looks like it has been taking some measures to reduce its risk profile. As of the end of the second quarter, SuRo held positions in 37 companies with an aggregate fair value of roughly $160.3 million . The BDC also had $100.4 million in cash and short-term US treasuries, around 38% of gross assets. The BDC's NAV per share ended the second quarter at $7.35, around $1.35 lower than its guidance for the third quarter. $16.8 million worth of investment activity saw SuRo take a position in three new companies.

Learneo's percentage position within SuRo's portfolio is now down from 30.8% in the first quarter to 20.3%. The BDC's top five portfolio company investments also accounted for roughly 51% of its total portfolio at fair value, down from 59% in the first quarter. The BDC is chasing diversification whilst keeping AI-based ed-tech platform Learneo as its largest position. Fintech has also become SuRo's largest investment theme at 35.3% of its portfolio from 29.8% in the prior first quarter. The BDC is set to report a portfolio of 39 companies when it announces its third-quarter earnings with the addition of another two investments.

Returns In Turbulent Times

SuRo generated a second-quarter total investment income of $1.37 million , up 53.9% over its year-ago comp and a small beat on analyst consensus. Net investment loss was $3.8 million, around $0.15 per share and up from $0.12 per share in the year-ago period. SuRo's net realized loss on investments was higher at $13.3 million, around $0.51 per share. These seem like solid companies but equity valuation is driven by sentiment which has trended down with public peer comp for the private companies within SuRo's portfolio mostly trending down through 2023.

Shareholders should be on the lookout for the performance of PSQ Holdings ( PSQH ), a marketplace of patriotic businesses and consumers. This was the company that Colombier Acquisition Corp, a special purpose acquisition company that's SuRo's second largest investment position, closed its business combination with. Performance since then has been poor with PSQ losing almost 50% of value from its $10 SPAC reference price. I'm most excited about its small position in AltC Acquisition Corp, a SPAC that is set to take small modular nuclear reactor startup Oklo public. Critically, "higher for longer" aggregated with a turbulent global environment will keep investor sentiment muted. For venture exposure, I'd look at BDCs focused on investing through debt. This might have to be swapped only once rates start falling.

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