This year saw less investment activity than in prior years. The only new private deal we invested in was Photo Vault, a venture play on the idea that a newfangled technology can capture some value from the Inflation Reduction Act's climate change funding. Importantly, we also increased our position in Smartemis substantially. We considered other deals—Rick's stadium cocktail maker, Tom Anderson's electronic plaform for HNW, Dan Gilham's marketing strategy for HNW, etc.—but none of those passed the now-crucial test we (informally) developed in the wake of the NextAlim and Transportation Authority losses: if the company doesn't make money yet and there is a legacy founder remaining in the deal, we pass. More than the dearth of sexy options, though, the fact that we have a considerable amount of our liquidity tied up in private deals also has put the brake on our activity. As of this June, we have 81% of our capital, or $2.4m in private deals, the highest ratio since the exit from ABBQ. While this is increasingly looking less-than-optimal, I expect this to be our steady state for the next few years.

The performance of our public portfolio lagged the market somewhat. This is mainly because we were underinvested starting the year due to my worries about a rate-inspired selloff. We are a bit better positioned now, I believe, particularly because I finally pulled the trigger on some Japanese investments. Good thing the stocks themselves have performed so robustly (~+35%) since I put them on Feb 8, given that the yen has fallen ~10% against the dollar over the same period.

The final "overview" note is that we stood up Centerpitch over the reporting period, the 50/50 version of Nakano. Legally, Nakano is the manager of Centerpitch. In any event, the latter exists, has a bank account, and as of the end of this reporting period holds two investments.

Expenses were down slightly on an annualized basis from 2022 (HY 2023 expenses: $21.6k, -12.6% YoY, annualized). I am showing these consoldated here but will begin to break them out by entity as Centerpitch takes on more of the expense load. For this reporting period, Centerpitch accounted for $4.3k of total expenses. Three big items stand out: 1) The "Office Rent" line is overstated for the half year, because there was a double payment when we switched offices, offset somewhat by the fact that the new office rent is 8.3% less than the old one; 2) the "Office Furniture" expense (for John Beckelman's painting, which only I like, apparently) is a one-off, and I don't expect any more spending on that for the rest of the year; and 3) the Credit Card line, in which there is about $889 of "Business Travel" from my trip to see Smartemis (the hotel in Munich and the flight from Munich to Lyon). I am going to break this out as a new category from now on, along with "Client Entertainment", which will include the dinners, tickets, etc. which we pay for with Nakano/Centerpitch money. Finally, we haven't yet had to pay Pivot so I put a dummy in there for the rest of the year for their inevitable billing.

All told, our expense ratio is projected to be slightly down to 0.77% by year end, as our expenses fell and our denominator became bigger. I'm calculating this ratio as Total Expenses / Net Equity + Retained Earnings. The prefered way is Total Expenses / Net Asset Value; while this is interesting, and more "favorable" at 0.45%, I'm more interested, for now at least, in how much equity and profit we burn up each year in expenses.

There are several corrections that need to be made to our equity contributions. These are due to my miscalculations as to how I was going to handle the standup of Centerpitch.

My approach here is to roll everthing back to the end of 2022, and recalculate the equity positions of Nakano and Centerpitch, and what if any distributions or contributions need to be made for each of them. The largest change is that I've reversed the April/May payments in Nakano we made to address the fact that we had to fund Photon Vault out of Nakano, even though it is a Centerpitch investment. Instead, we're now truing up that investment from within Centerpitch, where I should have been doing it originally.

On the Nakano side, there are five corrections: a small historical correction based on a decimal place error; a payout to Wiesner for the "accidental" equity distribution made in Q1; the corrected and simplified accounting for the Photo Vault investment; the equity transfer from Nakano to Centerpitch for the recent Smartemis investment; and the reversing out of the April/May payments made to attempt to adjust for Photon Vault.

For Centerpitch, things are more straight-forward: a receipt of equity for the Photon Vault investment made in March; the transfer of $507k into Centerpitch from Nakano in June; and the equity investment Wiesner made into Centerpitch directly in June.

New deals: 2, for $804.6k (+26.7% YoY). New investments: Photon Vault ($100k; current expected return: 0%; outperformance return: +400%) and Smartemis ($1.3m; current expected return: +200%; outperformance return: +600%).

The $804.6k that we invested in private deals in the first half of 2023 represents our largest amount over any previous six-month period. We made two investments: a new venture investment via a SAFE contract (with a 30% discount) in Photon Vault, an energy storage provider, and an upsize of our preferred shares position in Smartemis to $1.3m. Also during the period, the $92k loan that we made to partially fund a Drexler family property in Cedar Rapids paid off.

Net, we ended the period with $2.4m of exposure to 6 private deals via 12 separate investments.

Smartemis and ScreenMeet ($575k; current expected return: +250%; outperformance return: +600%) will increasingly dominate our mindspace. Both companies have firmly made the transition from venture-ish ideas to fully fledged operating companies at near profitability. Consequently, our risk exposure to them has morphed from proving out the business model, to maximizing the earn-out at exit. Bill has committed to putting me on the board at Smartemis, so we will have a front-row seat there as we approach a sale, which needs to happen before the December 2027 maturity of the call options we've "purchased" to take 10% top-line revenue of the 25 or so clinics that are currently on the Smartemis platform. In the case of Smartemis, our expected return of ~$4m assumes that we will achieve a 15x return at minimum and have around 100 clinics signed up. Our outperformance case of around ~$9m assumes the collection of at least 200 clinics and a multiple of 20.

For me, it is harder to predict the ScreenMeet case, because of the potential disruption from AI-boosted customer service alternatives to Ben's system. He doesn't see that as a problem; for him, it is rather how they get from their current 200-ish customer base to 2,000 without too much dilution. We own around 3.5% of the company's economics (in the case of Smartemis, we own 7% of the economics and 11% of the vote). The ~$2m expected return on our investment with them assumes that they are valued at a bit more than the $50m valuation at which they printed their last funding round. Our out-performance case of ~$5m assumes that Ben will be able to sell the company for more like $150m.

Receipts: We received three payments from three other deals in this period: Northfield ($30k), The Transportation Authority ($2.6k), and Clover Basin ($4.6k). The Northfield payment was the first payment we've received from them; once we receive a payment from a deal, I write up the MTM from 75% invested principal to 100%. In the case of Northfield, I'm less sure, given that the payment came in the wake of their first six-month extension request. Those Dreamfinders guys run a very loose shop; we've probably run the course with them. The TAA payment was notable for two reasons: it came by paper check from a law office, and there was no explanation sent to us explaining what it is. Our conclusion was that it wasn't worth the effort to track this down any further. Probably no more Blue Jay deals for us.

The Malingerers: Bloom Intelligence ($100k; current expected return: 0%) and Lung Therapeutics ($50k; current expected return: 0%). Will Wilson's Q2 2023 update states that Q2 revenue was up 14% YoY at ~$250k, which became ~-$40k net operating profit, yet they "hit profitability and expect to be profitable for the remaining year." Rick (who sits on the board) thinks they actually might be profitable, so I have moved our mark to 0% expected return — an upgrade meaning we expect to get our money back. Lung Therapeutics still exists; their main drug is still in Phase 2 testing, and their last funding round was in 2022 (the one we participated in). I'd bet they're dead, but deals are still being done in biopharma at comparable valuations, so I am going to wait before I start dinging the MTM.

New public investments: 8, or $132.9k; sales or maturities: 16, or $352.1k. HY 2023 public returns: +$112.9k (+9.9%, non-annualized). New investments: Mitsubishi Heavy (7011.T), Mitsui (8031.T), BNP Paribas (BNP.PA), Deere & Co (DE), Alphabet (GOOG), Oneok (OKE), Pfizer (PFE), and a 3M Tbill.

We bought seven stocks and one bond in the first half of 2023 — considerably more activity than 2022, when we made no public purchases. Nevertheless, our stock/bond exposure dropped significantly in 2023. After making large tax loss sales at the end of 2022, I didn't put back on much risk in early 2023, concerned about a significant retrace in the face of the Fed's record-breaking rate hikes, weak Chinese post-COVID growth, and the war in Ukraine. This wasn't the right decision: the S&P total return rose 16.9% from Jan 1 to Jun 30, while our public stock-only portfolio rose only 11.9%.

Some legacy winners that dodged the end-of-year tax harvesting saw upside in the first half, notably GS. We took some profits to pay for the two private investments, mostly from ABBV, LMT and JNJ. I got back into some GOOG in early Feb, which contributed about 15% to our 6m gains. Three new international investments — 8031.T, 7011.T, and BNP.PA — were made through Interactive Brokers; the Japanese stocks have gained 50% in total return since we put them on. On the negative side, small cracks at DE ($40k), OKE ($20k), and PFE ($140k) cost us $35k in total after I exited by May. We also made money on the ~$300k of cash held during the period, and bought our first T-bill since 2020, a 3-month note yielding 4.9%.

Our 21.2% annual return on equities since we opened Nakano's eTrade account on May 24, 2019, is 91.0% higher than the 11.1% we would have earned in the S&P. The two moments that brought us here: 1) excellent timing in ramping up our stock investing after COVID, and 2) avoiding most of the selloff in 2022 by rotating into dividend paying stocks at the end of 2021.