Winfield Capital Aims to Start Up Strong Track Record

Looking for the next CMGI (CMGI)? Some think they have found it in Winfield Capital (WCAP).

The White Plains, N.Y.-based company, whose full-time staff is limited to a chief executive, a chief operating officer, a chief financial officer and a clerical worker, invests in privately held businesses, with a particular emphasis on Internet-related companies. And when those private companies go public, the boost to Winfield's portfolio value could be huge. The story sounds much like that of CMGI, the Andover, Mass.-based Internet investment company whose share price jumped from about 13 1/2 to as high as 226 over the past 12 months, thanks to its investments in companies like Lycos (LCOS) and GeoCities (GCTY).

Picking winners has made CMGI an Internet darling to investors, but its recent price hike has made the company's stock too rich for some tastes. Winfield Capital provides investors a more affordable entry into the world of Internet venture capital, but can another a small company put together a winning track record?

Winfield is one of the more than 300 small-business investment companies -- officially known as SBICs -- that are licensed to invest in small businesses with money provided by the Small Business Administration. Rarer still, Winfield is one of a handful of SBICs that isn't a private partnership, but a publicly traded company. Winfield has an investment pool of about $30 million, with a sizable part of that money lent by the SBA at less than a 7% interest rate, according to Paul Perlin, Winfield's CEO. (By comparison, CMGI had no trouble raising $272 million just for its latest venture capital investment fund.)

The high-tech profile of Internet companies runs counter to the standard image of SBA-aided companies, but the usual Internet start-up does meet the SBA's criteria of having a net worth below $18 million and an annual net income of less than $6 million. And Winfield isn't the only SBIC to make such an investment: The privately held SBIC Women's Growth Capital fund, for example, has stakes in Women.com Networks and womenConnect.com.

So far, only one of Winfield Capital's investments has generated jackpot returns. The company invested $1.7 million in online retailer Cyberian Outpost (COOL) in late 1997 and early 1998, before Cyberian Outpost went public. Now, Winfield Capital's stake of more 1.4 million shares is worth about $30 million. Winfield also owns a piece of the recently public RoweCom (ROWE), which helps companies manage their subscriptions to periodicals. Winfield Capital's stake, more than 150,000 shares bought for $1.5 million in December, is now worth more than $4 million.

But more IPOs are on the way. Winfield has stakes in three companies that have registered to go public: Juno Online Services, which provides Internet service and free email; WorldGate Communications, which provides Internet connections via cable TV; and Mpath Interactive, which started out as an online gaming company but now focuses on selling tools to help sites build online communities.

"The Internet space has been pretty important to us," says Perlin.

Not all of Winfield's investments are Internet-related. A sizable part of the portfolio, most recently itemized in an annual filing from a year ago, is made up of loans to such mundane businesses like Bob's Auto Body Shop and a restaurant called the Fishmarket Inn in Westchester County, N.Y.

These loans are holdovers from before Perlin came aboard in 1995 and switched the company's investment focus from loans to investments involving an equity component. Perlin brought in as COO former Chase Manhattan (CMB) executive David Greenberg, who is also co-founder and president of a dog-chew company on whose board Perlin served. Greenberg sold the company in 1995 to pet-product giant Hartz Mountain. Perlin's brother, Scot, a former American International Group (AIG) executive, went from part-time to full-time status as the CFO within the past year.

Earlier this month, Winfield's stock shot up to as high as 25 1/2 from the low teens as more investors caught on to its Internet stakes. But the primary issue for investors in Winfield is whether the investments warrant the stock's valuation. The yardstick for measuring how well the company does, says Paul Perlin, is the value of its investments. "Our primary objective is to increase net asset value," he says.

As of Dec. 31, Winfield's investment portfolio was valued at $40.5 million; with 5.7 million diluted shares outstanding, that portfolio was worth about $7.08 a share. Add in other assets, including cash, and subtract out liabilities -- primarily an $8.3 million loan from the SBA -- and you end up with a net asset value of $5.75 a share.

But that doesn't include the possible value of other investment stakes in companies such as San Jose, Calif.-based TeraStor, a company that is developing a high-capacity, low-cost electronic storage medium for backup or library solutions, and Commerce One, a Walnut Creek, Calif.-based company involved in business-to-business commerce.

"It's really hard to figure out what the net asset value is" for Winfield Capital, according to one hedge fund manager who has stock in Winfield. The manager bought into the stock at 9 a share, selling half at 20 1/2 earlier this month after the stock's run-up. But that uncertainty hasn't deterred the manager. "I was extremely impressed with the number of deals these guys got into very quickly," the manager says, citing Winfield's "ability to find companies that are going to go public in a very short period of time and buying at a big discount to public market valuations."

Paul Perlin says his company is developing a good track record. "I think we're beginning to demonstrate that we have the ability to access a better-quality deal flow," he says.

But it's more difficult nowadays for small companies to put together the kind of track record that CMGI did in the past, a mutual fund analyst points out. Too many people are chasing after deals in the wake of CMGI's success. "I would be skeptical," the analyst says, adding, "It doesn't mean it can't be done."

Certainly Paul Perlin is aware of CMGI's benchmark, but he says it's premature to compare Winfield to CMGI. "I would only be delighted if we could put together a performance record that could warrant that kind of comparison," he says. "We just hope we'll be able to put together a portfolio and have a good batting average."

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