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 Unicorns - start-ups valued at $1 billion or more - are making
front-page news around the globe, and that makes Danoff nervous. He
runs the $111 billion Contrafund FCNTX.O for Boston-based Fidelity
Investments and his pre-IPO investments can lend an imprimatur of
legitimacy, given his track record of picking blue-chip winners.
"There are so many unicorns. It means you have to be more careful
than we were three or four years ago," Danoff said in a telephone
interview with Reuters. "Maybe we are at a point where it's going to
lose a bit of luster."
Danoff, 55, is not a household name and lacks the swagger of hedge
fund managers such as Pershing Square's William Ackman or Third
Point Capital's Daniel Loeb. But through Contrafund, a staple in
U.S. 401(k) retirement plans, Danoff manages more money than those
two combined. And over the past 15 years, Danoff has beaten the S&P
500 Index by 62 percent, with an annualized total return of 8.12
percent versus the benchmark's 5 percent, according to Morningstar
Inc data.
Danoff's Contrafund has about $1.4 billion invested in pre-IPO
companies that include social media site Pinterest Inc ($457
million), office space business WeWork Companies Inc ($212 million),
and car service Uber Technologies Inc ($193 million), for example.
It's the single largest portfolio of pre-IPO companies in the U.S.
mutual fund industry, according to industry fund disclosures.
http://reut.rs/1lqcbox.>
"You need to find franchise companies, almost up there with Google,
Twitter and Facebook," Danoff said. "These phenomena are cyclical.
You have confidence early in the cycle, but you do investments with
extreme caution later in the cycle. I'm much more careful with my
recent moves in the private space."
Over the past three years, the valuations of private companies such
as Uber, Xiaomi, Snapchat, Pinterest, Airbnb and Dropbox, for
example, have skyrocketed, as they prepare to become publicly traded
companies. Mutual funds such as Contrafund have become a bigger
player in an investing sector once dominated by venture capital
firms, boosting competition.
HOT IPO
"It's similar to a hot IPO," Danoff said, describing the competition
for getting a piece of the action in the private rounds of funding
for start-up companies.
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However, Danoff said he may only get one shot in investing in a
unicorn before it goes public.
"It's little more difficult to pass up (than an IPO) because you're
never sure if you get that second look," Danoff said. At least with
an IPO, you can buy the stock later if the price drops. Danoff did
that with Facebook Inc FB.O and now owns a stake worth about $5
billion.
But in recent weeks, unicorn valuations have cooled off. Several
funds run by Fidelity, including Contrafund, have cut the valuations
of some big private companies, including Snapchat, Zenefits and
Delphix Corp. Individual portfolio managers don't set valuations,
which at Fidelity are done by a separate investment committee.
Contrafund doesn't own Snapchat, which the committee devalued by 25
percent in October, but it does own Delphix, which the committee cut
by 43 percent.
Danoff said he feels good about the two dozen or so pre-IPO
companies in his portfolio. But even two years ago, when Contrafund
made a $159.4 million investment in Pinterest's Series E funding
round, Danoff admits to balking at the price.
"I was like, 'My gosh, that's a high valuation,'" Danoff said. But
since then, the value of that Series E stake in Pinterest has
climbed nearly 150 percent, according to Contrafund disclosures.
(Reporting by Tim McLaughlin. Editing by Richard Valdmanis, Carmel
Crimmins and John Pickering)
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