This Fund's Troubles May Only Grow


When meVC Advisers launched the first publicly traded venture-capital fund in March, 2000, the timing seemed impeccable. Investors were crazy for tech stocks, and the idea of getting in early on the next Microsoft was too delicious to resist. The meVC Draper Fisher Jurvetson Fund I (MVC) snapped up $312 million in its initial public offering.

Two years later, the results couldn't be much worse. Since its inception, the fund's share price has fallen 55%, to $9. That loss is particularly acute because during the entire time, some 60% of the fund's assets were in cash and money-market funds -- which didn't fall during the tech meltdown. Then there are the high fees that meVC Advisers charges shareholders despite the fund's poor performance -- 2.5% of assets annually plus 20% of any profits in the fund.

Those investments and fees have now sparked a lawsuit from shareholder activist Millennium Partners, a private money manager that owns 4% of meVC's shares. The suit, filed in February, alleges that San Francisco-based meVC Advisers failed to fulfill its "fiduciary duty" as a venture-capital manager by leaving so much money in cash. "The fund still has $160 million invested in cash," says Robert Knapp, Millennium's managing director. "To earn a 2.5% management fee on that cash, when all meVC is doing is investing it in money-market funds, is excessive and absurd," he says.

"WITHOUT MERIT"? Last year, meVC hired Fleet Investment Advisors to run the cash portion of the fund for 0.10% of assets, according to the firm's most recent proxy statement. Yet meVC's Oct. 31, 2001, annual report reveals that it collected its 2.5% fee for that cash. "Thus, meVC Advisers had a gross profit of more than $3.8 million in Fiscal 2001 from uninvested cash balances on fees paid to it by the fund, for which it performed no services or unreasonably minimal services," Knapp's suit alleges.

Alex Zion, an meVC spokesperson, issued a statement saying the firm "believes the case is without merit," but declined to comment further because of the pending litigation.

Because meVC is a publicly traded closed-end fund, its share price isn't tied to the value of its underlying portfolio or its net asset value (NAV). So even though the fund's NAV fell only 30% since inception, to a current value of $14.02 a share, its market share price has fallen even further, to $9, meaning it trades at a 36% discount to NAV. That $9 share price is actually less than the $10-per-share of cash and short-term bonds the fund now has on its books.

HIGHLY ILLIQUID. "It's almost unheard of for a closed-end fund to trade below its cash levels," says Thomas Herzfeld, a closed-end trader who owns shares of meVC, though he isn't involved with the suit. If meVC's discount closed, shares would rise from $9 to $14.02 -- a 55% gain.

Why is the discount so big? Because the tech startups meVC owns are highly illiquid and don't trade on any exchange, their valuation has become a subject of debate. Knapp's suit alleges that meVC Advisers hasn't properly marked down the value of some holdings "in a timely manner," so that it can continue collecting management fees on assets that may have an inflated value.

The fund's latest quarterly report reveals that the Valuation Committee of its board of directors marked down the price of one security, MediaPrise, by 100% on Jan. 31. Three months earlier, meVC Advisers had valued it at its acquisition cost of $2 million. How did a $2 million value drop to zero in such a short period? "That is a very troubling example," says Knapp.

LOOKING FOR A NEW MANAGER? Though the goal of Knapp's suit is to recoup the excess fees, at this point he would also like to have meVC Advisers dismissed as the fund's manager. "There's a lot of ways this fund could be made into a very attractive investment, but not with meVC Advisers at the helm," he charges.

Shareholders are to vote on the renewal of meVC's advisory contract on Mar. 27. If they don't approve it, meVC's contract will expire, and the fund's board will have to find a new manager.

It won't be an easy victory for disgruntled shareholders, however. Five days after Knapp filed his lawsuit, meVC Advisers filed a proxy statement, asking shareholders to amend its investment advisory contract. Under its proposal, shareholders would no longer vote annually to renew the contract. Only the fund's board of directors would vote. Two of the board's five members are employees of meVC, the proxy states.

"UNBELIEVABLE." If meVC loses this fight, the fund's board will have to negotiate with disgruntled shareholders like Knapp and Herzfeld. "It's unbelievable that the board hasn't taken any measures to narrow the discount of this fund," says Herzfeld. "I can think of a dozen different ways of doing that."

His solutions include buying back shares of the fund or distributing the excess cash to shareholders. As the vote rapidly approaches, however, looks like a major battle is about to ensue. By Lewis Braham in New York


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