Open Letter to Renren Special Committee, Board of Directors and all Renren Shareholders from private investors

BIRMINGHAM, Ala., Sept. 25, 2015 /PRNewswire/ -- The following is an open letter sent September 25, 2015 to the Special Committee, Board of Directors and all shareholders of Renren Inc. This is a follow-up to the open letter written on July 24, 2015.  

• Sum of the parts fair value is $6.72 per share; ultimately we believe further upside remains beyond this price as investments mature
• The bid freezes out shareholders from any possible asymmetrical benefits of $500 MM FinTech-based VC portfolio

We reiterate our conviction and IMPLORE the special committee of the independent directors of Renren, Inc. ("Renren") to REJECT the extremely low privatization offer (the "Offer") of US$4.20 in cash per American Depositary Share ("ADS") from Mr. Joseph Chen ("Chen"), Chairman and CEO of Renren, and Mr. James Jian Liu ("Liu"), a Board member and COO of the Company. We further request that the special committee of the Board RETAIN external financial and legal advisors to evaluate the non-binding proposal which is standard practice. Our analysis concludes that the Offer undervalues the sum of the parts by roughly 40% and discounts tremendous value not accounted for in both its balance sheet and operating assets. Moreover, the low ball offer removes any possibility of Renren shareholders realizing the potential of its promising VC portfolio of over 25+ companies and $500MM of "at cost" investments, some of which are likely to realize windfall profits. Furthermore, ALL SHAREHOLDERS WILL NOT REALIZE future synergies that many of these investments share with Renren.com. Shareholders have waited patiently and remained loyal IN GOOD FAITH under the guise that they will benefit and, just as the investment fruits are starting to materialize, Chen and Liu are attempting to enrich themselves to the detriment of ALL OTHER SHAREHOLDERS. It is particularly unsettling to see such a lowball offer right after Chen declares that the transition is complete in the last earnings call, "Four years ago we were a social networking company, now we are a social finance company."  

We understand the interest in buying out Renren at this juncture. Clearly Chen and Liu believe there is little downside at this level. It is unfathomable to think that a $4.20 per ADS offer is adequate and in the best interest of ALL the shareholders when considering fair value by our calculations to be approximately $6.72.  

We, as shareholders, question where the board has been since the IPO? We are hopeful, but not confident, that our interests are being served by the current board. Renren has been in a downward spiral and, while Chen has proven to be an astute investor, it appears that he can unilaterally invest whatever he wants, whenever he wants with or without synergies and without pushback from the Board. As a public company, shareholders deserve more transparency. For example, why is $90MM invested in two different hedge fund products with one single manager? Regardless of where these strategies fit (we cannot see it) the investment amounts are inappropriately high and it appears like there is little to no board oversight. To our knowledge, the company has no formal investment and/or risk management committee. 

We also challenge the conspicuously obvious lack of a conference call after the last earnings release. We opine that Chen and Liu now consider themselves a private company with few shareholders. Many other China privatization candidates managed to have an earnings call after their buyout proposals were submitted and just elected not to answer questions on the "going private" proposals. Shareholders were not provided the right to get an update on the internet finance initiatives, as well as other activities, which would support a higher valuation. We scanned 10 other China buyout companies; Renren was the only one to have both of these characteristics 1) no hiring of outside advisors to evaluate the proposal; and 2) no conference call after the earnings. 

We IMPLORE the Special Committee and Board of Directors, who include distinguished VC professionals from Softbank, General Atlantic and DCM Ventures, to be mindful of their fiduciary duties to ALL SHAREHOLDERS and to uphold the Renren Inc., Code of Business Conduct and Ethics ("Code"), as mandated by Section 406 of the Sarbanes-Oxley act of 2002. Clearly a potential for conflicts of interest is possible when so many inter-connected relationships exist with significant and controlling shareholders, board members, etc., maintaining such common professional interests such as venture capital and private/public market investing. A particular emphasis must be placed on the first bullet point of the Code purpose: 

"This Code is designed to deter wrongdoing and to promote."

• "honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships."

Below we attempt to lay out as cleanly as possible the three primary components, in a sum of the parts fashion, that make up our valuation estimate.

Venture Capital Overview

To realize how dynamic and significant Renren's portfolio is, one needs a window into the basics of VC economics.  

• The top 20 firms generate approximately 95% of the industry's returns. Firms like Sequoia, Foundation, Accel, etc. Many of Renren's co-investors are in this group of top tier firms.
• 80% of a typical VC's returns come from 20% of its investments, so it is highly asymmetrical.  Invest $1 and lose $1 or potentially make $10 or even $50+. 1 big winner swamps 10 losers.
• If 20% of a fund generates a 10x return, and the other 80% gets wiped out to $0, the fund generates an IRR of about 15% annualized over 5 years.  
• You have to be non-consensus AND right to make a big return.
• Often times, a leader in a market is worth more than all the other companies, combined.  
• Revenue growth is far more important than profitability when gauging pre and post IPO performance. It is better to defer profitability and cement leadership through aggressive top line growth than allow a competitor to catch up.
• VC's know that public tech investors pay crazy multiples for high growth internet-based leaders in traditional industries with massive markets (like Financial Services).  

Renren Venture Capital Portfolio

Due to lack of publicly available information, there is no perfect way, so we have used cost, factual info and industry return benchmarks, to estimate what Renren's VC portfolio will be worth in the future. That said, Renren already has a proven 10x winner in the mix with SoFi, which greatly mitigates the downside of its entire portfolio as detailed above. This is not reflected, as such, on its balance sheet due to the equity method of accounting where long term assets can be marked down through impairment but not marked up to reflect actual private market valuations. In addition, Renren has $260MM+ dedicated to "FinTech" with the majority of that based in the domestic US. They have made key investments in online lending, investing, and services, etc., which could prove to be a catalyst and unlock value in Renren.com as these firms look to gain entry in China. The US focus also shields them, to some degree, from China economic weakness.  

At a minimum, we could value all investments at cost and then mark up and down accordingly based on recent valuations like SoFi. This is problematic, and highly unlikely, as it provides no future growth value for SoFi and the other 25+ investments in its portfolio. Surely there will be complete wipe outs (marked to $0) but the FinTech area, among the other areas invested, is a secular story of financial services being redefined by the millennial generation over the next 25 years and Renren appears to be touching all the critical areas.  

SoFi is a marketplace lending leader with an emphasis on student loans. It just passed $5B in total originations and is considered a FinTech leader in credit quality, securitization and customer acquisition among other things. The student loan refinancing market is $1.2T large with at least $200B considered creditworthy by private investors. They have a defensible niche in acquiring, servicing and maintaining their customer base and have a huge growth trajectory due to the size of the markets, marketing edge and expansion efforts into mortgages, personal loans etc. Goldman Sachs earlier this year published, in a "Future of Finance" research piece, that P2P or marketplace lending could take $11B in annual profits from traditional US banks over the next 5 years.  

SoFi is a direct beneficiary and could easily be on its way to a $10B market cap over the next few years. As we stated above, valuations for the market leading incumbents can reach dizzying heights and this cannot be ruled out for SoFi as it seeks to become #1 in its category. Lending Club, presently worth $5B, reached a market cap of $10B in the past 12 months and in many ways it seems SoFi is in a much more enviable position. In our opinion, if SoFi were to go public in today's market, it could easily trade at a $6B valuation with the potential to be a much higher valued business down the road. A 20-30x VC return on Renren's investment in SoFi is not unreasonable.  Airbnb, Dropbox, eBay, Google, Facebook, Twitter and Uber have all returned 1000x the VC's investment. Here are a few potential scenarios. 

1)      Renren VC Assets at $4B SoFi Valuation (latest round)

2)      Renren VC Assets at $6B SoFi Valuation (future)

3)      Renren VC Assets at $10B SoFi Valuation (future stretch)

4)      Renren VC Assets at $4B SoFi Valuation (latest round) + one more 10x return
on 20% of its remaining portfolio (amounts to $90 MM invested) + remaining
investments all go to $0.  (hypothetical future)

These examples just underscore how absurd it is to value all of Renren for just $4.20. 

Using scenario #2, Renren's VC portfolio should be valued at $4.51 for purposes of the sum of the parts valuation. 

Balance Sheet Assets

These tangible assets are self-explanatory for the most part. They include an office building in Shanghai contracted for in 2012, along with the aforementioned hedge funds.

Renren has $1.20 in tangible assets on its balance sheet, exclusive of its VC portfolio

Renren.com Operating Business

Renren's current negative growth, which has been ongoing for many quarters, is reflected in its EV.  Renren has 45 MM Monthly Active Users (MAU) in the college aged demographic, and is the #1 SNS on campus, but the market is speaking loudly essentially valuing the business at about $100MM. This organic traffic base is of huge, mispriced value as they transition to "internet finance" and allows them a significant low cost customer acquisition source as they identify new growth products and partnership opportunities with many of the companies they have invested in.  

As is very clear from the VC overview, the public market pays up big for top line growth which is how Renren reached a $7B+ valuation several years ago. The market cares more about the DIRECTION of the growth than it does about the ABSOLUTE number. That is how Renren was able to trade at 50x its sales when it IPO'd, on the promise it could grow into its large market cap because it was growing its traffic and revenue at a high clip. Renren just needs a growth initiative in order for it to get back in gear, "internet finance" seems to hold the most promise.

Renren Fenqi is the first product to be launched in this category. It is an installment loan platform that allows students to finance smartphones, consumer electronics, fashion etc., and is a promising business that could kick-start that growth. At the end of April, it had 270,000 users who had placed orders for $50MM of products. Shareholders were supposed to get an update on this business in the last earnings release, but we were denied this right. This easily could be the engine that drives future growth of Renren.com. For comparison purposes, two installment loan competitors Qufenqi and Fenqile have raised $200MM and $100MM respectively in the past year with rumored valuations in the $300MM to $1B range.  

Ironically, Renren invested $34MM in Snowball Finance in China (xueqiu.com) which is a social network for public market investors based in Beijing. This translates to a valuation estimate around $200-300MM for Snowball Finance. According to Alexa, this site trails Renren 228 to 161 in actual site rankings in China. Are we supposed to believe that Renren is worth a fraction of all these nascent services? The fact remains it is a significant source of future organic and "low cost" revenue if the right products can be delivered. 

After significant analysis, we believe the most practical way is to assign an EV $ value to each MAU (monthly active user) net of all cash, to come up with an MAU to Enterprise Value (EV) ratio.

-The average MAU is worth $30 per MAU in market cap on these comps (ex RENN). If we apply a 75% discount, each RENN monthly active user (MAU) should be worth $7.60. 

Renren's operating assets are worth $1.01 per share

Again, we request that the Special Committee reject the extremely low, non-binding proposal price of $4.20 and RETAIN outside Financial and Legal Advisors to protect the interests of ALL SHAREHOLDERS, both small and large.

Respectfully,

John Romero
Patrick Small
Contact email:
[email protected]

Forward-looking Statements
Certain statements in this release are "forward-looking statements" which reflect our opinions, assumptions, and thoughts regarding valuation possibilities and, any appreciation in the value of the various assets, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "may", "should", "would", "could", "believe", "realize", "estimate", "could easily", "freezes out", "windfall" and similar expressions have been used to identify these forward-looking statements. Such forward-looking statements reflect our current beliefs with respect to future events and are based on information currently available to us. Forward-looking statements involve significant known and unknown risks, opinions and assumptions. A number of factors could cause actual results or achievements to be materially different from any estimates, valuation methodologies or possibilities and projections that may be expressed or implied by such forward-looking statements including, without limitation, those risks and uncertainties discussed in this release. Investors should conduct their own research and not place undue reliance on these forward-looking statements. Although the forward-looking statements in this release are based on what we believe to be reasonable assumptions, we cannot assure anyone that actual results or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date on the release and we do not intend, nor assume any obligation, to update or revise these forward-looking statements to reflect new events or circumstances.

SOURCE Romero Small

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