Pre-IPO AI And Exceptional Governance At Suro Capital

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I believe Suro Capital is a superior steward of capital compared to VC hedge funds and offers significant AI infrastructure exposure without "Two and Twenty" fees.Suro's notable AI infrastructure pre-...

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BlackJack3D/E+ via Getty Images I have long believed that venture capital (“VC”) has a place in an investing portfolio. Public markets are often argued to unlock value from pre-IPO stage by virtue of shares becoming newly accessible to all investors. In recent years, I came to perceive that Suro Capital (NASDAQ:SSSS) is a superior steward of capital to any VC hedge fund that I know of. I also favor not having to pay “Two and Twenty” as was long needed to allocate capital exclusively to the category. I see myself as a high information shareholder, monitoring my investments closely. But Thursday night’s reveal as to the magnitude of Suro’s AI infrastructure exposure was a surprise to me. The market for Suro shares has since calmed down, but it does not appear that I was the only one initially surprised: eTrade stock chart Concentration in AI themed pre-IPO investments is as relevant to risk as to forward-looking potential returns, it bears noting that the announced $55 million AI infrastructure exposure ($25 million CoreWeave, $17.5 million Open AI, $12 million Vast Data) does not include Suro’s other AI themed holdings, some of which predate its first capital allocation to CoreWeave. Other significant Suro pre-IPO holdings include Canva and Learneo. Canva began transforming into an AI themed software business in 2022 and most recently Canva acquired Leonardo AI. Not to be confused with Canva’s Leonardo AI, Learneo is a distinctly separate and meaningful AI themed holding of Suro. Learneo's distinct AI business platforms include Quillbot and Symbolab. Certain public edtech has struggled and that comp input has deteriorated Suro's markings for Learneo. But even the least publicized Learneo acquisitions like DSS (bartleby® and Student Brands) have demonstrated that Learneo will category fit “AI themed” as much as it fits edtech if and when Learneo files to go public. As I listened to Suro’s quarterly investor updates, I felt allure to my perception of value in AI themed holdings like Canva and Learneo; they already feel like proven businesses worthy of our public markets. That concludes my discussion of AI themed holdings, although I will refer to recent writings as pertain to IPO timing in the section where I discuss valuation. Regardless which Suro holdings intrigue me, I do not have a competency in AI. All my writings are topics highly unique to investments like SSSS, which fall under the Investment Company Act of 1940. My allure to, or intrigue for, specific holdings is never a high order topic. Why Suro and why now? Suro Capital has long represented a foundational investment in VC, which tends to work (or not work) in cycles. The risk profile of VC is put simply, huge. Good VCs conduct due diligence, but these portfolio constituents are not subject to the same filing scrutiny as public companies. The potential for exponential returns like Suro's May 2012 investment in a $56M VC round of Palantir (PLTR - Now a roughly $100B S&P 500 company) needs to be balanced by an awareness that even the best venture capitalists have numerous failures. VC is tremendously risky, subject to unproven companies, unproven business models, and unproven themes like AI becoming absolute busts. One risk many people fail to consider is that cycles in the broader appetite for risk assets, can effectively close the IPO market. That risk quite bluntly has been a risk painfully realized by many shareholders of Suro over the last several years. Suro shares are still trading at a meaningful discount below net asset value (\"NAV\") because the IPO market has been virtually shut down. A closed IPO market effectively means no gains distribute to shareholders. With Business Development Companies (\"BDCs\") and Closed End Funds (\"CEFs\"), no or low distributions often means shares trade at a meaningful discount; high distributions, shares can trade at a premium above NAV. Exceptional Governance and the Stewardship of Capital With no distributions paid from Suro recognizing gains in its portfolio, nor any market appetite for VC categorically, Suro's own shares as a publicly traded BDC have been largely ignored. “Out of Style” does not do justice to the VC category over the last several years. Rather, VC has been an absolutely horrific category from 2021 through 2024. Investing in the VC style in the early part of this decade has been akin to catching a falling knife. Quarter after quarter on Suro's investor calls, CEO Mark Klein has been quite transparent that Suro was patiently waiting for the VC market to wash out to deploy more precious capital. Such messaging was depressing, but Klein's savvy and seasoning has proved out. Klein has a keen savvy for the cycle of VC and IPO markets. Prior Suro investor calls are still accessible and highly worthy of a listen to appreciate the significance of Suro's long awaited bullish posture. Suro is internally managed meaning it does not have an Advisor firm to which it pays assets under management (“AUM”) fees like CEFs do. Historically, I have avoided certain Advisor contracted CEFs like NBXG out of being unable to substantiate the VC holdings were being written down enough or quickly enough due to the Advisor's conflict of interest. Even greater conflicts of interest exists with many gated VC hedge funds. These are not issues at internally managed Suro. Having sharp pencils and writing down its holdings aggressively, the pain of the VC market was primarily endured in Suro shares from Oct 2021 through the 1st half of 2023. Suro's use of corporate actions over the last several years is the single greatest indicator of its superior (pro shareholder) governance. During this terrible period where VCs have reflected great pain, and even and into early 2024 as that pain was diminishing... Suro has repeatedly accreted per share net asset value while removing a substantial supply overhang in its own shares. Three separate Dutch style tender offers over the last 25 months allowed logic minded shareholders to recognize their losses from the VC downturn at prices which were above market, but still handily net asset value (“NAV”) accretive for Suro. Such repeated actions prioritizing shareholder interests over AUM without any Activist needing to agitate for the same represent exceptional governance. More detail is below to demonstrate the scale of proration and the relevance to washing out excess supply of shares, but Suro’s stewards deserve an especially unique positive reputation among peers for prioritizing shareholder interests above their personal egos or the AUM. Details on accretive, high proration tender offers above market In September 2022, existing shareholders got roughly two-thirds proration at $6.60. Then, the most effective tender was completed in April 2023, with 99.1% proration for existing shareholders at $4.50, the very top of that Dutch tender’s range. Affording above market liquidity allowed shareholder losses to be washed out, with scale.  Earlier this year, Suro did yet another Dutch tender offer which priced at $4.70, again NAV-accretive and again motivating sellers handily above what the prevailing market had been. This tender was small and still provided nearly 70% proration. What this means is that even while there have been a dearth of buyers until the last week, there were not many large-scale sellers of Suro shares at prices above market. And the sellers have repeatedly been enticed to do so. What is Suro currently worth, and where might it trade? It's important not to assume the accuracy of marks in any BDC or VC focused investment pool. I do trust the marks of Suro's non-public holdings being conservative based on my observances quarter to quarter and the lack of stewards having any Advisory contract conflict interest. The CEO is a frequent buyer, most recently August 20. As a buyer, Klein would benefit from lower markings, not higher. Suro's current NAV is marked between $6.50 and $7.00. So presently, Suro shares trade at a discount from, not a premium to that NAV. Since Suro's portfolio just visibly shifted to \"risk-on\" (and focuses on AI), it now appears wise to also consider whether and (if so) when public markets will favor or disfavor AI infrastructure and AI themed investments. My competency is not in pre-IPO AI companies such as CoreWeave, OpenAI, or Vast Data. I do not know whether any or all will ever IPO; much less when. The most recent (Oct 14) writing on CoreWeave asserts that it is \"considering an initial public offering as early as next year.\" If and when CoreWeave or any of these do file to go public, it would surprise me more to see Suro shares still reflecting any discount to then current NAV than to observe them trading at a premium. Upon such filings, a SSSS premium of some magnitude would not surprise me. A premium for Suro can be justified, completely irrespective of any potential fanfare or darling nature, to its pre-IPO holdings. I called Suro a foundational VC investment because historically Suro has been disciplined about monetizing its investments as its lockups expire. Returning to my original premise, Public markets are often argued to unlock value from pre-IPO stage by virtue of shares becoming newly accessible to all investors, etc. When public valuations for portfolio constituents are achieved and BDCs recognizes the gains, those gains are distributed to shareholders. Yes, this is precisely what happened in the last cycle for Suro shareholders. And Those distributions are highly meaningful historically to whether entities like Suro which fall under the Investment Company Act of 1940 trade at a relative discount or premium to their NAV for those periods. Near term pricing levels In the very short term before considering any movements in NAV or potential changes to the valuations (or filing status) of holdings, the prices where Suro's own corporate actions bought back its own shares in scale may be useful to look at for areas that provide support, resistance levels, or otherwise be relevant to trading behavior. Each of the three 2022–2024 tenders afforded tremendous proration, meaning those who wanted to sell at these levels were (already) able. Those levels again were $4.50, $4.70 and $6.60. Yes, I do accept fully that certain securities take on a life of their own. In theory, fortunes may go up or down rather randomly like a stack of chips in a poker tournament. The conditions here... the absence of a supply overhang and the unique access to pre-IPO AI darlings do make that far more plausible for SSSS shares than anything else in which I invest. But that possibility is fully outside of my investment thesis.  Whether human or artificial, all intelligence is conditioned to have expectations based on a set of learned observations. I see myself as a highly rational and value minded investor. Few of the rational positions I have taken have thereafter taken on the path of poker chips. 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