We have seen a rising interest of mutual funds in private companies in the last couple of years. From less than 15 funds investing an aggregate valuation of $16 million in private companies between 1995 to 2000, the number is now up 6 times to 90 unique funds of over $8 billion in 2015. Interestingly, 36% of venture-backed IPOs in 2016 had also in fact received mutual fund financing prior to going public. The number of private VC-backed companies that receive their first financing from mutual funds each year has also almost quadrupled from 2011 to 2015.
Source: GAO Proprietary Research
Some mutual funds that invest in non-listed companies are Hartford Growth Opportunities, Franklin Templeton Investments, Brandes Investment Partners, and more notably, T. Rowe Price and Fidelity. The companies that they invest in include: Uber, SpaceX, Deliveroo and Snapchat.
So why has there been an increasing number of mutual funds investing in private companies? Here’s why:
1. The number of companies listed in the US have dropped 50% from 1996 to 2016.
This makes it virtually impossible for investors to get diversified exposure to the US economy without espousing private equity. Furthermore, holding out on investing in pre-IPO companies could also mean missing a critical stage in the company’s growth or even potentially missing the opportunity of investing in a unicorn.
Between 2011 and 2015, mutual funds have also provided a substantial amount of capital to the private companies they invest in - an average of 33% of the total financing raised. In fact, a mutual fund investment enables a company to stay private for 2.8 years longer.
2. Median time between first round venture financing and IPO has more than doubled to 7.4 years in 2013, up from 3.1 years in 2000.
This delay in seeking an IPO for private companies has allowed them to grow larger, become more developed, and become less risky as compared to their counterparts from a decade ago. Many of today’s private startups have proven business models, experienced leaders, audited financial statements, and even actual earnings, making them an enticing new alternative that mutual funds can no longer overlook.
Do you know how much PE exposure you’re getting through your mutual funds already?
For a free correlation analysis between the different parts of your portfolio, please contact us at enquiries@hedgequery.com.