Let’s move away from Canada for this post to Crossroads Capital (NASDAQ:XRDC), a closed-end fund that invests in mostly privately held technology companies. Major investments include Zoosk, Tremor Video, Suniva, and a bunch of other tiny tech companies you’ve never heard of.
Crossroads was formed in 2008 to invest in tech companies that were big enough to attract venture capital attention but too small to go public. The company was originally called BDCA Venture Inc.
Shares were listed on the NASDAQ starting in 2011 at $8.70 each. They fell steadily through the next few years, finally hitting a low of $2 each earlier in 2016.
Business went along as usual until 2015 when Bulldog Investors got involved. The activist investor bought more than a million shares of the company, building up a stake of more than 10% of shares outstanding.
The board was convinced to stop making new investments and to begin the liquidation process. Shareholders approved this plan back in May. The company now plans to give up its listing on the NASDAQ and turn itself into a liquidating trust. There’s no deadline for liquidation.
At first glance, shares look to be a terrific value. As of March 31st, the fund’s net asset value was $4.25 per share, which included $1.40 per share in cash. Shares currently trade hands at $2.03 each, meaning investors are paying just $0.63 per share for investments that are worth $2.22 per share.
Even if the portfolio gets wrote down 50%, we’re still looking at a liquidation value of $2.51 per share, which represents pretty decent upside from today’s price. A 25% return with almost no risk is usually right up my alley.
Unfortunately, with Crossroads, it’s not quite that simple. Here’s why I’m avoiding this opportunity.
One of the problems with Crossroads’s liquidation is the nature of its investments. Only one is publicly traded, and it’s only 1.3% of net asset value. The rest are private. Without intimate knowledge of these companies, we’re forced to trust the company’s estimate of fair value.
Additionally, management has already wrote off a significant chunk of value already, reducing NAV from $5.06 at the end of 2015 to $4.25 at the end of the first quarter. NAV the quarter before that was $5.63. I don’t like that trend.
Finally, there’s the issue of time. We don’t know how long it will take for this liquidation to take place. It could take at least a year or two to sell these assets at full value, assuming there’s even buyers out there for them at all. Money isn’t flowing to tech like it used to be.
The other troubling thing is the company’s operating costs. In the first quarter alone, the company had $621,912 in operating costs. Some of these costs will be reduced once the company is no longer listed on the NASDAQ, but the vast majority of costs are from operational and professional fees. These don’t look like they’ll go down much.
At $620,000 per quarter of operating costs, the net asset value will be reduced from $4.25 per share to $3.99 just from the company continuing to exist. Some of this will apparently be offset by cash being stuck in interest-paying accounts, but I still don’t like this cash burn.
If Crossroads was stuffed with assets I could easily value, it would be a screaming buy at today’s price. It would even be attractive with far less of a spread between the NAV and the current share price. But with the portfolio filled with assets I can’t value, I’m going to pass on this one.
Disclosure: no position