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 Fast-growing private companies such as Uber Technologies, Pinterest
and India's Flipkart Online Services have attracted billions of
dollars in investment from U.S. mutual funds, marking an increase in
overall pre-IPO betting over the past few years, analysts and fund
managers said. It's a way to boost their returns and differentiate
themselves from faster-growing index funds.
Funds run by Boston-based Fidelity Investments and Baltimore's T.
Rowe Price Group, for example, more than doubled their money with
pre-IPO bets on Facebook Inc. And shares of lesser known Zafgen Inc
are up 15-fold since the Fidelity Select Biotechnology Portfolio
made a pre-IPO investment of $11.2 million in late 2013. Zafgen's
IPO was in June 2014.
"We're seeing more activity in the private market over the past few
years as companies delay their IPOs and stay private longer," said
Katie Reichart, an analyst at fund research firm Morningstar Inc.
"It can be a big boost if they get in early. Mutual fund managers
don't want to miss out on that runway to growth."
A comprehensive, industry-wide picture is difficult to track because
mutual fund companies don't disclose their aggregate private company
investments. Disclosures from No. 2 U.S. mutual fund company
Fidelity, however, show that some of its biggest funds have more
than doubled their pre-IPO investments over the past two years.
Of course, some pre-IPO bets have fizzled after companies made their
stock market debuts. Twitter Inc was an IPO darling in 2013, helping
Morgan Stanley's $2 billion Small Growth Company Portfolio generate
a 62 percent return for investors that year. The fund invested in
Twitter when it was a private company.
Twitter shares have tumbled some 46 percent since reaching $69 a
share in early January 2014. Last year, the Morgan Stanley fund lost
10 percent, partly because of Twitter's plunge, while peer funds
posted an average return of 2.4 percent, according to Morningstar.
Morgan Stanley declined comment.
Andrew Boyd, who oversees private company investment for Fidelity,
said the pre-IPO market has become the IPO market of the past, but
it's only available to investors such as venture capital firms,
mutual funds and hedge funds able to put up large amounts of money
that once were only available through public markets.
Before, rapid growth might happen after a company's initial public
offering. But now, much of it is happening before the IPO as the
pre-IPO financing allows companies more time to mature and get
bigger out of the public eye. From companies looking for capital,
Boyd said, "We hear that constantly over and over, 'We're just not
ready for the limelight of (being) a public company. But we need
capital!'"
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Once Fidelity invests it also holds regular meetings with companies
to see if they can make accurate quarterly projections and handle
tough questions from skeptical fund managers, Boyd said. "Finishing
school isn't a bad way to think about it," he said.
As a result, a company like ride-sharing service Uber may make its
stock market debut with a value of more than $50 billion. By
contrast, Google Inc's market capitalization was only about $23
billion when it went public in 2004.
Funds run by Fidelity, T. Rowe Price and Morgan Stanley's investment
management arm have become the most aggressive pre-IPO investors in
the fund industry, U.S. regulatory filings show. Fidelity's $111
billion Contrafund alone had at least $900 million invested in
late-stage, pre-IPO companies at the end of April, fund disclosures
show. The fund's pre-IPO investment in photo-sharing website
Pinterest, valued at $419 million, was more than its stakes in Home
Depot ($356 million) and General Motors ($342.5 million).
Boyd said Fidelity funds typically have less than 1 percent of their
assets invested in pre-IPO companies. Some of the biggest bets, as
disclosed by the funds, are on Uber, Pinterest, Intarcia
Therapeutics Inc and Space Exploration Technologies.
But Morgan Stanley's $2 billion Small Company Growth Fund takes a
much more aggressive approach. For example, about 5 percent of the
fund's assets are invested in pre-IPO companies.
And one of the single biggest pre-IPO bets, as a percentage of fund
assets, is the Morgan Stanley fund's nearly $50 million investment
in Flipkart, India's biggest e-commerce firm. That's 3 percent of
the fund's assets, disclosures show.
(Reporting By Tim McLaughlin; Editing by Richard Valdmanis and John
Pickering)
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