2Q17 produced a solid result for the fund, as we had two of our largest positions as well as a few smaller ones contribute meaningfully, ending the quarter up 8%, and 11% year to date through June 30. Our cash continues to build based on emerging liquidity events, as we ended the quarter with 13% in cash and income oriented liquid vehicles, with the expectation of cash growing to over 20% by the end of 3Q17. We continue to be judicious in making new investments, while also building industry specific hedges around our exposure, as well as a broad market hedge.
Positions appreciating during the quarter included Sunlink, Vietnam Azalea, Shea Ventures (co-investment in Chegg) and The Hotel Group. The last two of these positions fully liquidated in June, while the Vietnam Azalea Fund appreciated with a cash distribution in August, expecting a final distribution in September. Final realization and return on our investment in The Hotel Group, which you may recall was in a single hotel property in South Bend, Indiana, was approximately 2.3X our capital allocation, or a 28% IRR over our span of investment. This investment is another example of a longer term hold, as we first invested in THG in 2011, turning up an investment return some years later. We continue to see these types of events occur in our portfolio, with an expectation some of our larger portfolio positions may experience such events in the future. While we are not forecasting any specific events by year end/in the near term, we continue to see a few interesting possibilities of significant value generation and return over the next 12-18 months.
On an administrative note, we have begun the process of further integrating a third party valuation firm to value the private companies we hold, Alvarez Marsal. Alvarez is perhaps the most widely used firm by private equity and venture capital funds in performing valuation work, thereby what we believe is the best external validation we could look to utilize. Our valuation process has been run internally in the past, which has received compliments from both our auditor and Alvarez, however we believe our use of a third party valuation firm provides us with the added external support around our internal processes and procedures. Thus far, we have found our internal valuation procedures have erred slightly on the conservative side, as Alvarez’ review has thus far led to a slight mark up of positions they have evaluated. The net result of this process will likely lead to a bit more volatility in the portfolio quarter to quarter, as the market based approach Alvarez utilizes looks to approximate the price movements of public companies in the same sectors, thereby representing more of a “real time” value of our private company positions.
Feel free to call us any time with thoughts or questions on the portfolio or otherwise, as we are available at 206-489-0400.
Robert J. Martin | Echelon Capital LLC
firstname.lastname@example.org | 206.489.0400