2016 was a year of consolidation and refined focus within our portfolio, concentrating our efforts on our largest positions, while continuing to see liquidity materialize on others. As a result of this exercise, we have accrued a reasonably large cash and yield oriented marketable securities position, comprising over 20% of the fund’s current net asset value. Away from cash and yield oriented securities as our top holding, the portfolio has maintained its top three positions in Sunlink, Lighter Capital and the Vietnam Azalea Fund. One item to note in thinking about the performance of these positions (and all others) is only Vietnam Azalea is comprised of a portfolio of public securities that can be marked to market daily, while Sunlink and Lighter are directly held positions in private companies, which only change in value based on valuation models constructed in tandem with our auditors. While both Sunlink and Lighter experienced substantial growth in revenue during 2016, the value we ascribe to them was not marked up even remotely close to that same rate of change. As a result, we believe there is a fair amount of embedded value in the portfolio (within Lighter, Sunlink and a few other positions), which is not reflected in the performance reported for the year. Summaries of these three positions are below, which will provide better context to this broad observation.
We own approximately 20% of the company, with board level representation and significant visibility in to their operations. Sunlink ended 2016 with $66M in revenue, up from $41M in revenue in 2015, a 60% growth rate, largely driven by the roll-out of a new product and continued strong demand for their core products. The company was also subject to an indication of interest from a larger public company in the fall of 2016, at a price level significantly higher than the valuation implied by our mark at that time. Sunlink ultimately determined not to pursue that offer in the fall, letting the buyer know to hold out for six to nine months and revisit, as the company wanted to get the roll-out of their new product right, before walking down the path with a new owner (believing that the early stage of development of that product would ultimately not have enough data points to allow for the buyer to close on the proposed transaction to buy Sunlink). That acquirer has since reengaged with the company and is sniffing around a bit, with a second buyer of the company also having emerged. Ultimately, we do believe the company will be sold in the next 6-12 months to either one of these two acquirers or perhaps even another entrant, however will largely be contingent on the company’s ability to execute on the continued roll-out of its new product.
We own approximately 20% of Lighter Capital, also with board level representation and significant visibility in to their operations. The company continues to do well, with year over year revenue growth of nearly 100%, setting the stage to become a significant player in the world of technology enabled funding for companies of all sorts. We recently sent around a Lighter Capital update for those investors in the special purpose vehicle (SPV) we created for the Series B capital raise in 2015. Click through to this link to read that write up.
Vietnam Azalea Fund
The Mekong Capital team has done a great job realizing gains on over 50% of their portfolio, as our allocation to VAF was a large driver of our performance in 2016. The fund was up 41% for the year, selling into a strong market throughout, distributing over half of our capital back to us. We went on the VAF board in November of 2015 with the goal of encouraging the team to push toward opportunistic liquidity, which they have done a terrific job accomplishing. While a few three day trips back and forth to Vietnam for board meetings were required to solidify this message, our efforts were definitely rewarded and continue to be, as the final two positions in the portfolio are in the midst of being sold at premium valuations during the first half of 2017. We expect to be completely liquid on the VAF portfolio by the end of 2017, having realized much of our gain in the last two years after a nearly 10 year holding period.
With the realization of more liquidity events on the horizon, the continuing solid operational performance of our largest positions and the early success of our most recent allocations, we are optimistic for what 2017 will bring.
Robert J. Martin | Echelon Capital LLC
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