Yesterday, the New York Times published some interesting statistics about retirement funds investing in big privately held tech companies — including so-called “unicorns” with billion-dollar-plus valuations, like Pinterest, Uber, and Airbnb.
According to the Times, mutual funds run by firms like like Black Rock, Fidelity, and T Rowe Price made 29 deals to invest in private companies last year, worth $US4.7 billion. That’s up 16x from 2012, when only six such deals totaling $US296 million were made.
These companies seem like riskier bets than companies traded on public markets.
Their books are generally closed. Valuations are determined by agreement between investors and the companies, not by the real-time market actions of millions of investors. There’s a real isk that these companies will never go public, or will be acquired for less than they’re worth now.
Fortune’s Dan Primack says there’s no reason for retirees to panic. He points out that these investments are still a tiny percentage of the overall retirement funds’ investments — about 0.3% in the case of Fidelity’s Contrafund — and the only one with any exposure is a high-risk fund from T Rowe Price which was built specifically to invest in these kinds of startups.
But it’s also notable that these investment firms have little choice. There’s a desperate search for high-yield investments going on right now in the investment community. Bonds aren’t cutting it. The public stock market has been choppy.
Tech is typically a higher-risk higher-growth investment, but a lot of the fastest growing tech companies are staying private for longer than they used to.
For instance, when Microsoft went public in 1986, its revenue was $US196 million — that’s $US417 million in today’s dollars.
By way of comparison, Facebook’s revenue when it filed its IPO in 2012 was $US3.7 billion. Uber is expected to book more than $US2 billion in net revenue (that’s total revenue minus payments to drivers) this year.
There are a number of reasons why big companies like this are staying private, but a lot of investors and execs blame regulations like Sarbanes-Oxley, which require public companies to deal with more red tape than they used to. Other folks, like investor Keith Rabois, say this is basically an excuse and founders just don’t want the kind of scrutiny that successful public companies have.
Regardless, investors are apparently willing to take slightly riskier bets to hit their funds’ targets. Those bets increasingly include big, fast-growing, privately held tech companies.
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