IPOs can generate strong returns, especially for investors who acquire shares before the public offering. But getting in at a company’s early stages can be difficult, and assembling a diversified portfolio of pre-IPO firms requires large amounts of capital.
Keating Capital (KIPO), though, helps investors overcome these challenges. The Denver-based group’s closed-end fund focuses on pre-IPO investing. According to Tim Keating, the firm’s CEO, “What that means in plain English is that we provide capital typically to venture capital-backed technology companies that are seeking a final round of financing prior to their going public.”
He adds that the fund’s investment strategy is straightforward: “Buy privately, sell publicly and capture the difference.”
KIPO has some $73 million in net assets and about 9.5 million shares outstanding, Keating notes. As of Dec. 31, the fund had 17 companies in its portfolio, including two publicly traded and 15 private companies. (Details on current holdings are available on the fund’s site.)
The fund’s general policy is to maintain a portfolio of about 20 companies, with each holding equally weighted to about 5% of the total portfolio.
Although the general equity markets are near all-time high valuations, Keating doesn’t see evidence of a price bubble in the fund’s prospective or current investments.
“We tend to bifurcate our universe into companies above a billion dollars in value and below a billion dollars in value,” he explains. “A lot of the bubble concerns tend to cluster around the companies that are $1 billion-plus in value. We focus our investments on sub-$1 billion categories, and the valuations are more down to earth in many of those companies.”
The fund made its initial investment in January 2010, with 90% of its total investments made in 2011 and 2012.
KIPO’s shares began trading at roughly $10 per share in December 2011, but by May 2012 the price had dropped below $6.50, according to According to historical price data tracked by Yahoo! Finance. It’s traded mainly in the $6.00-$7.50 range since, then and was in the $6 range as of mid-March.
That performance naturally raises a question: Why should investors consider this stock now?
Keating says it’s a question of understanding the fund’s investment cycle, which he maintains is at a favorable point for generating better returns.
KIPO invests in a company for about two years before its IPO. The fund is then subject to a six-month lockup. Add another 12 months to dispose of the fund’s holdings and you have about a 3 1/2-year cycle from investment to realized gain.
“Our objective is to generate a two-times return over a typical four-year holding period,” says Keating. “And, whenever we generate a realized gain, we are required on at least an annual basis to distribute at least 90% of those gains as dividends to our stockholders.
“So given the starting point of our first investment in January 2010, and the fact that 90% of our portfolio was invested in the 2011 and 2012 vintage years, we’re now reaching a critical point where we expect a substantial portion of the portfolio companies to go public,” he added.
The fund’s dividends have been growing, as well: from $0.03 per share in 2012 to $0.49 per share in 2013.
This year’s dividends are set at $0.10 a share for each of the first three quarters, with a final distribution in the fourth quarter representing realized gains. The combination of portfolio sales, growing distributions and the shares’ discount to net asset value creates what Keating describes as a “very attractive proposition.”
Still, pre-IPO investing is a high-risk, high-return investment strategy, he notes, and KIPO is not appropriate for a conservative or risk-averse investor.
But for investors who already have small-stock exposure, the fund could be appropriate for a 2%–5% allocation of the overall portfolio.