Venture-Capital funds link small investor looking for a growth company
Data General Corporation, Federal Express, Apple Computer -- all are thriving corporations nurtured in their infancy by early investors who made a bundle when these companies went public. The individual investor rarely has the opportunity to invest in young companies bound for glory unless the investor can afford to put aside a minimum of $250,000 for at least four years and forget about it.
There are, however, a small number of public investment companies that invest in young, unproven companies and can serve as appropriate vehicles for a small investor to benefit from venture capital gains.
The funds, which are closed-end and bought and sold as stocks on either the American Stock Exchange or in over-the-counter trading, provide the opportunity for both appreciation of stock price plus capital gains distribution -- if they invest wisely. (Unlike mutual funds, a closed-end fund does not buy back its own shares; therefore the price of its shares, though influenced by a rise or fall in its net asset value, is set by demand and supply for the shares.)
The underlying philosophies of these companies vary widely. Rand Capital Corporation, for example, tries to invest in start-up firms in the vicinity of its hometown of Buffalo, N.Y. Allied Capital in Washington seeks franchisees to back, among other things.
One of the best performing funds last year was the Nautilus Fund, formed only in February 1979 and managed by Eaton & Howard, Vance Sanders Inc. in Boston. Much of the net asset gains of the fund are directly attributable to a single investment -- 360,000 shares of Apple Computer, bought at a cost of $585,000. When Apple went public in December at $22 a share, Nautilus's Apple holdings were valued at $7.9 million. Net asset value per share of Nautilus jumped from of Nautilus.
Because of its Apple shares, the price of Nautilus stock resembled a roller-coaster ride last year. Investors were so eager to get an early bite of Apple that they bid up the price of Nautilus from $20 in August to as high as $ 54 in November. When Apple went public in December and gained only seven points over the offering price, the price of Nautilus plummeted to the mid-30s, and it has been trading at $28 bid recently.
"Investors bid [our stock] up to where Apple would have had to sell at $50 or
He points out that his portfolio, now valued at about $26.5 million, has had other winners, such as Boston Digital, whose shares were bought at $25,000 and are now worth $215,000 in the public market. In addition, Mr. Toney expects that a 25,000-share holding of Boschert Inc., the makers of a low-powered switching device for computers, will be bought by a British company to bring the fund $250,000 in gains.
Despite its reputation as a venture capital fund, Nautilus is willing to invest only up to 10 percent of its assets in true venture situations and prefers technology companies with a proven product. "We come along about halfway through the company's life before it goes public, when it is at the young adolescent stage," says Mr. Toney. Last year, Nautilus paid out 36 cents a share of capital gains and an annual dividend of 48 cents.
Another top-performing public venture fund last year was Capital Southwest Corporation of Dallas, but the company its gains among its shareholders.
"Our emphasis has been on capital appreciation," says William R. Thomas, president of Capital Southwest. "Our investors are in this for long-term gains." The fund has made only one capital gains distribution of 61.8 cents a share in 1979 since the early 1970s, but its net asset value per share as jumped from $21.83 at the end of 1979 to $26.77 on Sept. 30, 1980, the latest figure available. The price of its stock has risen from $15.25 on March 31, 1980, to $ 23.25 bid just recently.
Capital Southwest has invested a full 72 percent of its approximately $40 million in assets in restricted (nonpublic) securities, with a heavy emphasis on energy production and supply companies. Its strategy seems to work; Mr. Thomas points to an early investment in American Public Energy, a production company based in Dallas, which cost Capital Southwest $750,000, or $2.50 a share; the company went public last fall at $7 and currently is trading at about $7.25.
Narragansett Capital Corporation of Providence, R.I., was another top performer last year. With about $40 million in assets, Narragansett is the largest publicly traded small business investment company (SBIC) in the country. As an SBIC, Narragansett can leverage its capital base by borrowing from the Small Business Administration at reduced interest rates.
THe fund was started in the late 1950s by Royal Little, the founder of Textron, and now is headed by his son, Arthur D. Little (he's a nephew of Arthur D. Little of consulting fame). "We follow a very basic investment," says Mr. Little. "we invest in people. We're opportunistic when we see the right people at our doorstep, no matter what industry they're in."
With about 80 percent of its portfolio held in restricted stocks, Narragansett is invested in a wide variety of businesses. In the past year, for example, the firm helped finance a $2.7 million management buy-out of Spectrum Fabrics Corporation, a fabric design house from Consolidated Foods; a second-round $1 million financing of Selecterm, a seller and leaser of computer terminals; and a $3.3 million management buy-out of Chas. Gilman & Sons Inc., a Boston liquor distributorship.
Last year Narragansett realized a $6.2 million capital gain from a 1975 investment in Airborne Manufacturing, makers of aviation products. Airborne was bought by Parker Hanifin Corporation in 1979, and Airborne shareholders received shares of Parker in this stock-for-stock transaction. Narragansett sold some of that stock last year. "We've made more money from a deal before," notes Mr. Little, "but never as quickly."
The price of a share of Narragansett, traded over the counter, has risen from share increased to $34.97 as of June 30, 1980, (latest available figure) from $ 29.35 the year before. last year its 1,162 shareholders received dividends of $ 2.75 per share and a $1.75 stock dividend, which gave shareholders an additional three-quarters of a share of each share owned