How to Invest in Private Equity in Mutual Funds? | Jobs Vox


Private equity investing continues to gain steam and investor interest.

According to Pitchbook, the number of unicorns, or private companies valued at more than $1 billion, will increase from 39 in 2013 to 1,200 by September 2022. It also provided disappointments.

This update to Morningstar’s first 2016 “Unicorn Hunting” report assesses the historical trend in ownership of private-company shares of US-family open-end diversified US equity mutual funds between January 1, 2007 and June 30, 2022. It does not include exchange- money exchange and currency.

Historical context: Firms that paved the way in private equity investing

Mutual fund ownership of private-company stocks has exploded over the past decade and a half. In the year At the beginning of 2007, more than $110 million of mutual fund assets were invested in the stocks of private firms across nine fund families and 14 funds. This number is It has grown to $23 billion by the end of 2021. June 2022 before the broader market slumps and stocks of many widely held private firms fall to $15 billion.

As shown in Exhibit 2, as of 2013, Fidelity accounted for more than half of all mutual fund assets traded in the stocks of private firms. 2012.

Fidelity mutual funds, including Fidelity Contrafund FCNTX, made their first large private equity investment in Dropbox DBX in May 2012. Investments in private firms such as Intarsia Therapeutics, Cloudflare NET, Roku, Pinterest PINS, Moderna MRNA, MongoDB MDB, and Uber Technologies UBER followed.

In the year As of June 2022, more than half of Fidelity’s $8 billion in shares of 100 private firms was in just four companies: SpaceX, Fanatics, Circle Internet and Epic Games. Elon Musk’s SpaceX owns a third of the total.

of T. Rowe Price small and mid-cap funds, especially T. The total share of private and mutual funds of the company in 2018 was By the end of 2021, it has risen from $872 million to nearly $12 billion in 2018. Before falling to $5.2 billion in June 2022, mainly due to Rivian Automotive’s RIVN going public in November 2021

As Fidelity and T. Rowe Price ramped up their activity in private markets, several firms pulled back. Wellington, which buys several Hartford and Vanguard mutual funds, stopped investing in new private company equity opportunities in the late 2010s. Meanwhile, Morgan Stanley Investment Management got more selective after some illiquid private equity positions in its small- and mid-cap funds were overextended.

The current state of private equity investment

In the year As of June 2022, 113 US-domiciled, diversified US equity mutual funds owned at least one private equity firm in 27 fund families, representing more than $15 billion in total investments. These investments represent 5.8% of the 1,961 separate US equity funds in the Morningstar database.

Most funds maintained modest positions in private companies with moderate exposure to just 0.5% of portfolio assets. It’s rare to see funds put more than 10% of assets in the stocks of private firms, though it does happen. In the year As of June 2022, Barron’s Focused Growth will see BFGFX own 11.7% of the assets in SpaceX, which it has owned since September 2017.

T. Rowe Price New Horizons, the largest non-baron private equity firm, has an 8.8% stake spread across more than 50 companies.

Popular private-corporate equity holdings over time

Mutual funds, the most popular private firm equity space in dollars from 2007-2010, didn’t get off to a bright start. Wellington, Goldman Sachs, KKR and others backed Buck Holdings’ takeover of General DG in 2007.

Since 2011, however, many well-known technology and software family names have taken over.

The mutual fund rewards of Facebook’s (now Meta Platforms META) and Twitter’s TWTR IPOs prompted more fund companies to try private-institution equity investing in the mid-2010s. Ride-sharing company Uber, which went public in May 2019, was widely held by private equity from 2014 to 2018.

Cautionary tales of private equity investing

While investing in private companies is exciting, financial companies still need to proceed with caution; Many hot companies fail before or after their IPO.

  • Wework The WeWork fiasco of 2019 caught many funds off guard. In the year It became a popular holding in late 2014 when funds from eight mutual fund families started positions at $15-$16 per share. Some funds valued their WeWork shares to reflect paper gains of 300% to 600%. In the year In 2019, concerns arose about the behavior of the company’s management and CEO Adam Neumann, and the much-anticipated IPO was ultimately canceled. Fund companies started reducing their valuations. For example, in March 2020, T. Rowe had written down its shares to $3.60, nearly 80% of what it paid and 95% of its shares at the end of 2018. Eventually, WeWork went public in October 2021, but it was still a failure for the mutual funds that owned it.
  • DD Global. DD Global is another cautionary tale. One fund allowed the family to ride more than others. Davis Global Advisors bought several of its funds in DD in June 2016 at $9.56 a share and later added to its positions. For example, Davis Opportunity RPEAX Didi shares rose 4.6% in March 2020, on a 5.2% stake in Grab, the Singapore-based ride-hailing service in which Didi has invested. The total private-company shareholding was about 13%—close to the SEC’s 15% limit. Shortly after its June 2021 IPO at $14 per share, the Chinese government placed the company under a cybersecurity review and forced its app out of service, rocking the stock. When the usual 180-day lock-up period expires in December 2021, the stock trades for about half of what Davis originally paid. Davis Chance is still on the books with a canceled DD in 2015. June 2022 was at $2.50 per share, three-quarters less than it paid.
  • Intarsia Therapeutics. Biotech company Intarsia Therapeutics raised $210 million in November 2012 for a popular product, an implantable type 2 diabetes treatment. Alger Fund invested in the company in 2015. Alger Smd Cap Growth, now known as Alger Weatherby Specialized Growth ALMCX, placed up to 5.7% of its portfolio in Intarsia in December 2016, and Alger Small Cap Growth ASCYX rose 1.3% in June 2017. Alger sold after July 2019. Writing more than 70%.
  • Blue apron. Meal kit supplier Blue Apron highlights how private-company stocks remain risky even after IPOs. Blue Apron raised more than $100 million in May 2015 from 11 Fidelity funds. It should not exceed 0.15% of any Fidelity portfolio, which has proven prudent. In June 2017, Fidelity was sitting on a 16% cumulative stock in the lead-up to Blue Apron’s IPO, but the stock tanked after trading began. By the end of the six-month lock-in period in December 2017, it was down 60 percent. Loyalty is lost approximately 70% per purchase.

Big winners in private equity investment

Despite the explosive press, there are also plenty of success stories.

  • Airbnb Airbnb ABNB was a great situation. Fidelity, T. Rowe Price and Morgan Stanley paid $20.36 each in April 2014, after adjusting for subsequent stock dividends. By the time Airbnb approached its IPO, most mutual funds had gained 100%-200%. The stock peaked at $165 before closing at $145 on its first trading day. On paper, mutual funds have made huge returns of up to 700%. Airbnb didn’t suffer from a post-IPO hangover like some newly public companies. By the time the lockup expired, the stock had traded around $145, and mutual funds had gained more than 600%.
  • UiPath Business software company UiPath PATH raised more than $400 million in the second quarter of 2019, first seen by Fidelity and T. Rowe Funds at $13.12 per share. UiPath went public in April 2021 at $56 a share, quadrupling Fidelity and T. Rowe’s money on paper in less than two years. Despite pulling back slightly during the 180-day lock-in period, the fund’s companies posted a market-leading 300% return.
  • SpaceX. Elon Musk’s Space Exploration Technologies was the most popular private holding in the Absolute Dollar mutual fund as of June 2022. Fidelity owns $2.9 billion, while Barron’s Fund holds $800 million. On paper, SpaceX, which is valued at $70 per share in a June 2022 fundraising round, is the big winner. For Fidelity, this is an 800% return on initial investment, and for Baron, 364%.

The role of financial companies in responsible private equity investment

With the number of unicorns increasing and the ownership of mutual funds by private firms growing, it is important to remember that not every unicorn will be a home run. It is incumbent upon financial firms to conduct due diligence and manage risks appropriately.


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