Flipkart gains as US mutual funds hike pre-IPO bets

Morgan Stanley's $2-bn Small Co fund alone pumps $50 million

Flipkart gains as US mutual funds hike pre-IPO bets

US mutual funds are placing bigger bets on privately held companies to get a head start finding the next IPO superstar, a strategy that has yielded some dramatic payoffs and flameouts.

Fast-growing private companies such as Uber Technologies, Pinterest, and India’s Flipkart Online Services have attracted billions of dollars in investment from US mutual funds, marking an increase in overall pre-IPO betting over the past few years, analysts and fund managers said.

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, US regulatory filings show. Morgan Stanley’s $2-billion Small Company Growth Fund, for example, has about 5 per cent of its assets 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 eCommerce firm. That’s 3 per cent of the fund’s assets, disclosures show.

Such exposure has paid handsome dividends before. 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. And shares of lesser known Zafgen 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.

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 US 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 like Twitter have fizzled after companies made their stock market debuts.

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. 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!’”

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’s market capitalisation was only about $23 billion when it went public in 2004.

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.

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