Money Sends Funds on the Hunt for Unicorns
DAVID GELLES and
MARCH 22, 2015
at Airbnb, which sold private stocks to mutual funds.
Credit Peter DaSilva for The New York Times.
retirement accounts of millions of Americans have long contained
shares of stalwart companies like General Electric, Ford and
Coca-Cola. Today, they are likely to include riskier private stocks
from Silicon Valley start-ups like Uber, Airbnb and Pinterest.
money managers including Fidelity Investments,
T. Rowe Price and
BlackRock have all struck deals
worth billions of dollars to acquire shares of these private companies
that are then pooled into
mutual funds that go into the
401(k)’s and individual retirement accounts of many Americans. With
private tech companies growing faster than companies on the stock
market, the money managers are aiming to get a piece of the action.
Fidelity’s Contrafund includes $204 million in Pinterest shares, $162
million in Uber shares, and $24 million in Airbnb shares. Over all,
there were 29 deals last year in which a
mutual fund bought into a private
company, and they were worth a collective $4.7 billion, according to
CB Insights. That was up from six such deals, worth a combined $296
million, in 2012. T. Rowe Price was the most active big investor,
making 17 investments in private tech companies.
Because these tech companies are not required to issue financial
reports and are not traded on traditional exchanges, they are the sort
of speculative investments not normally found in retirement accounts.
Increasingly, however, investors are betting that these companies will
be bought or go public at prices that exceed their latest funding
rounds, a prospect that is anything but guaranteed.
think it goes beyond what mutual funds were set up to do,” said
Leonard Rosenthal, a professor of finance at Bentley University in
Waltham, Mass. “It’s great for the portfolio manager, but it’s not
necessarily in the interest of the shareholders of the fund. If
investors are looking for a portfolio of risky securities, there are
plenty of stocks to trade in the public market.”
dilemma for big fund managers is that fast-growing technology
companies are so reluctant to sell private stock to the public that
there is now a term — “unicorns,” reflecting just how wonderful and
magical they are considered to be — for the dozens of private firms
worth $1 billion or more. Several, including the ride-hailing company
Uber, the room rental site Airbnb and the digital scrapbook Pinterest
are worth more than $10 billion.Those lofty valuations, combined with
the eagerness investors show in bidding them up, have created a
shadowy market for private stock issued to tech companies’ early
investors and employees. For the last few years, mutual funds have sat
on the sidelines.
they are racing to get in. “More and more, the big lopsided growth is
happening away from the public markets,” said Andrew Boyd, head of
global capital equity markets at Fidelity.
Uber, which was valued around $40 billion in its latest round of
financing, up from $3.5 billion in mid-2013. That is more than 1,000
percent growth, compared with 28 percent for the Standard & Poor’s
500-stock index over the same time period.Yet the many billions of
dollars in new wealth being created by private tech companies is
largely being funneled to a handful of entrepreneurs, venture
capitalists and early employees. For the most part, the broader public
is left out.
“There’s a huge amount of wealth creation happening, and a very narrow
set of people are benefiting from it financially,” said Scott Kupor,
who, as a managing partner and chief operating officer at the venture
capital firm Andreessen Horowitz — a major investor in many of the
unicorns — is among that narrow set.
money managers argue that they are broadening this pool by giving
everyday investors access to tech’s money machine. And despite the
many risks, they say they believe the companies they are buying into
are big enough and established enough that the investments are not all
that much riskier than those in public companies of a similar size.
nowhere near the two guys in the garage,” said Mr. Boyd of Fidelity.
“We are near companies with hundreds of employees and billions of
dollars in revenue.”
while the dollar figures being invested are large, managers say
individual holdings of any one stock make up a small part of big
mutual funds, making the investments less risky. Fidelity’s Uber
stock, for example, represents less than 1 percent of each fund’s
investors, of course, that is a mixed blessing: Their retirement stays
safe, but when a company like Uber appreciates 1,000 percent, they get
only a sliver of the profits.
Private technology stocks are not new, but there have never been so
many, and they were never this big. In the 1990s, when going public
was more common, company founders would sometimes pool shares into
what amounted to a kind of exchange fund that allowed them to swap
their own equity for shares in other start-ups.
for anyone to see a significant return, a company had to be bought or
go public, which helps explain why ’90s tech firms were so eager to
have initial public offerings.
late 2000s, as companies started to stay private longer, founders and
venture capitalists began to look for ways to sell their shares for
cash, opening the door for employees to do the same.
came Facebook, whose private valuation went as high as $100 billion,
creating a vast market for private shares. So many people, from big
mutual funds to smaller investors, got their hands on so many shares
that Facebook was pressured to go public earlier than it otherwise
example has prompted many companies to try to limit how many
shareholders they take in. And investors have enabled those efforts by
writing lots of big checks, allowing companies to avoid the scrutiny
of a public offering for many years longer than would have been
possible a decade ago.
characteristic of pretty much every investment boom, what began as a
select few has grown so large that the earliest and biggest investors
are finding innumerable ways to sell their shares to the masses of
outsiders hungry to get in.
interest in private tech companies has become frenzied enough that the
market for private shares has moved well beyond big institutional
investors to investors with a few thousand dollars. Take SharesPost, a
broker for private shares, which last year started the SharesPost 100
fund, allowing anyone with $2,500 to buy into what amounts to a mutual
fund made of private shares in companies like Jawbone and DocuSign.
comes with plenty of risk. For starters, the fund is made up of shares
that are illiquid, meaning they are hard to move under normal
circumstances and nearly impossible to move when there is even a whiff
of bad news about the company. Furthermore, many of the larger and
early-stage investors have perks that no normal person can get.
Preferred investors, for instance, are often first in line to get
their money back, meaning that if the company is liquidated, they will
be paid before other investors.
matter if investors are big or small, there is still no guarantee that
private start-ups will be public market stars.
some of these companies,” said Jay Ritter, a professor of finance at
the University of Florida, “there’s no guarantee that they will go
A version of this article appears in
print on March 23, 2015, on page B1 of the New York edition with the
headline: Tech Money Sends Funds on the Hunt for Unicorns.
© 2015 The New York Times Company