'Venture catalyst' optimistic despite tech-wreck effect

Friday 10th August 2001

Eternal optimism must an integral part of being a venture capitalist. Without that, the thought of investing millions of dollars of other people's money in hugely risky technology start-ups would be petrifying.

The latest annual report of IT Capital, a self-titled "venture catalyst" - a term it seems to have coined and trademarked - is able to find plenty of silver linings amid the dark clouds hanging over the devastated technology sector.

The two-year-old company notes that VC funds established in 1999 and 2000 "are showing poor returns globally, relative to the funds that were started in the early to mid 90s. To date, ITC has performed at the top of the range in comparison to its public peers, and many of the private funds in Australasia."

"From a stock market perspective, IT Capital outperformed its worldwide industry peers over the past year when you look at its trading multiple to book value and percentage of its 12-month high. The market is acknowledging the quality of our investment portfolio and potential for upside surprises from our companies."

The key word here is "relative". IT Capital's share price has fallen from 37c a year ago to around 14c now, a decline of 62%.

From its tech-bubble high of 93c in February last year, the decline is a massive 85%.

Few investors are likely to be happy with this result and the only comfort is that IT Capital has survived, unlike many tech-sector investments overseas that are no longer with us.

Meanwhile, the company's track record of successful "exits" from investments is mixed. Of four outcomes from its eight investments so far, two have resulted in attractive profits, exo-Net and BMC Media.

US music site Tunes.com was taken over for a pittance to show a 67% loss on IT Capital's investment and, post balance date, Australian e-commerce software developer Streamlink went under.

Incidentally, the annual report was completed in early July and shows Streamlink's value at $1.2 million (IT Capital values unlisted investments at cost).

Just a few weeks later, Streamlink went into voluntary liquidation and is likely to be worth a lot less. Investors could be forgiven for wondering what the true value is of other unlisted assets on IT Capital's balance sheet.

Profit from asset sales boosted IT Capital's sales for the year to March to $14 million from $2.3 million. However, its net loss deepened to $4 million from $3.3 million.

There is no real explanation for this in the report, although chairman John Robertson and newly appointed chief executive Jeff Dittus say in their report that losses will be the norm for some time until the company extracts value from the bulk of its investments.

Fortunately, it has plenty of cash reserves of $13 million which will help it through what many hope is a cyclical downturn in the technology sector and it has stated it will "adopt a cautious approach to new investments."

Despite this, the company is optimistic that it can expand. Rather than try to raise new funds from shareholders, undoubtedly a difficult task given share price performance so far, the company has revealed plans to cosy up to international venture capitalists.

It strongly hints that a merger with one could be on the cards amid an industry-wide trend towards larger investment funds.

"IT Capital will be evaluating the consolidation opportunity among the other public venture-capital companies in an effort to rationalise our overheads versus our capital under management."

The report carries a very good description of the nature of private equity investors such as itself and points out that recent turbulence and losses by many is a rare event in a long history of outstanding returns.

It also shows that IT Capital is only part-way through a seven-year plan to invest, develop then profit from its investments.

This is a help to investors seeking to understand companies like IT Capital, which are different from operating companies and typically are woefully undersupported in New Zealand.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz Email: davidm@mcewen.co.nz

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