Biotech Values

[DewDiligence]

Re: HQH and HQL

>I look at the list of privately held companies and restricted securities and don't have the slightest idea how to evaluate those holdings without doing a lot of research on each, which would be thwarted by the fact that many are still private. DEW, do you have a sense of the value of the non-liquid holdings of HQL and HQH compared to how they are valued for purposes of NAV?<

The Funds value the private holdings at the companies’ implied valuation from the latest funding round unless there is a reason to use a lower valuation due to events since the latest funding. Thus, the valuation method is conservative—extremely so in certain cases.

>I'm trying to get a sense of what discount to NAV one might try to hold out for to buy in.<

In the good old pre-bubble days of 1998, HQH and HQL could be bought for an NAV discount of more than 20%! Then, the Funds implemented the 2%-per-quarter payout policy to close the discount. This helped a little and the ensuing biotech bubble helped a lot.

(When the discount to NAV is large enough, owners can effectively waive the Fund’s management fee. E.g., for the sake of discussion, if you expect the Fund to return 14% before management fees on its net assets, fees are 1.4% of NAV, and you can buy the Fund at a 10% discount to NAV, then the discount effectively wipes out the management fee in a one-year ROI calculation.)

In my opinion, 90% of more of individual investors would do better to play the biotech sector via HQH / HQL than by buying individual biotech stocks. When these Funds can be bought at a hefty discount to NAV, the odds get even better.