As Snapchat’s initial public offering (IPO) animates investors, not all portfolio managers will have been assessing the messaging app's numbers for the first time.
Fidelity and T. Rowe Price managers took the plunge much earlier, taking part in funding rounds for the pre-IPO stock as part of a growing trend among mutual funds to gain a slice of the venture capital cake.
Both fund groups should be in line for a quick win from their investment. Fidelity invested in 2015 and 2016 and T. Rowe Price joined it last year, with Snapchat then reportedly valued at $16 billion. The messaging app floated with shares priced at $17, giving it a market valuation of around $22 billion.
The share prices soared as high as $26.05 according to data from FactSet on the day of the IPO, March 2. It has since fallen just below $20 but at the time of publication was still above its float price.
But investors in their funds shouldn’t get too excited about the impact of the Snapchat buzz. For all that mutual funds have been enthusiastic backers of ‘unicorns,’ the moniker handed to unquoted companies that attain a valuation above $1 billion, few are making aggressive bets on these pre-IPO stocks, in keeping with their riskier nature.
Analysis of T. Rowe Price’s funds shows the group’s Snapchat investment has been spread across 10 different mutual funds. Even the funds with the highest weightings, the Global Focused Growth and Science and Technology portfolios, have respective positions of just 0.43% and 0.35%, with most others running a weighting of around 0.15% and the Global Allocation fund holding just 0.01%.
For Fidelity funds, which built their Snapchat stakes in 2015 and 2016, it’s a similar story. The $35.9 billion Fidelity Growth Company fund has a 0.17% weighting, falling to 0.14% for the $18 billion Blue-Chip Growth fund and just 0.06% for the $104 billion Contrafund.
That’s not to downplay the significance of these investments. As highlighted in Cheat Sheet in our last edition, academic Jeff Schwartz found the Fidelity Magellan fund’s private equity portfolio delivered an annualized 42% between June 2012 and March 2016.
And it’s not just Fidelity boasting strong numbers. Citywire A-rated Henry Ellenbogen’s $17.5 billion T. Rowe Price New Horizons fund is another example of how modest private equity investments can nevertheless provide a substantial boost to returns.
The fund has returned 100% over the past five years, among the best performances of any Small-Cap Growth funds, helped by an astounding performance from its private equity investments.
The fund began investing in venture capital in September 2009, with Ellenbogen taking over the fund the following year. Prior to this, he was an associate manager, responsible for making recommendations about the fund’s private equity deals.
Over the eight years the fund has been making venture capital investments, that portion of the portfolio has delivered a weighted annualized return of 34.8%, well ahead of the 7.7% annualized return from the Russell 2000 Growth index.
The bulk of that return has come from companies Ellenbogen invested in that have since listed in initial public offerings. Over those eight years, a total of $539 million was invested in such firms, swelling in value to $1.2 billion.
The most notable of these has been Twitter, which the fund bought in 2009 as a listed firm then valued at $1 billion. By the end of 2013, a stake the fund had built at a cost of $12.3 million was worth more than 20 times that, at $278.6 million, as Twitter stock reached an all-time high.
Ellenbogen sold his position the following year as Twitter began to drift from those heady levels in what has proved to be a wise move, with the stock having fallen more than 60% from its peak.
Over the five years to the end of 2014, Twitter’s surge made an absolute contribution of 2.88% to the New Horizon fund’s returns, an impressive result from an initially modest investment.
There have been other big successes, like the 2013 backing of food delivery group Grubhub and an investment the following year in software maker Atlassian.
‘The goal of our early-stage holdings is consistent with the fund’s mission: to invest in small companies that compound wealth for our shareholders and become large companies,’ said Ellenbogen in the fund’s latest annual report, released last month.
‘Our goal is to own leading companies. Constantly updating our understanding of private market innovation and competition is a valuable part of our process.’
New Horizons' private equity returns have been prolific
But the record of another early Twitter investor, the Morgan Stanley Smaller Company Growth fund, provides a warning of the potential pitfalls of backing funds that look to supplement their portfolio with unquoted investments.
Unlike the New Horizons fund, the Morgan Stanley portfolio hasn’t matched its acumen in spotting Twitter’s potential with strong returns from quoted stocks.
Over five years, the fund has delivered just 48.5%, well below the 71.9% average for funds in the Small-Cap Growth sector.
That mediocre return even includes a stellar 2013 for the fund, driven in large part by its stake in Twitter, as the portfolio rocketed 62.3%.
But just as Twitter was a big contributor to the fund’ s brief outperformance, so has it played a k ey role in its subsequent slump.
The Morgan Stanley fund’s stake in the social messaging app, although roughly half the size of New Horizons’ holding, made up a much bigger proportion of the fund, standing at 5.4% of the portfolio by the end of 2013.
The plunge in Twitter’s shares since was a heavy weight on performance, with the fund down 18.6% over the following three years. Any investors lured into the fund by 2013’s stellar performance have paid a heavy price.
Morgan Stanley Smaller Company Growth remains one of the more aggressive backers of unquoted companies, with 8.2% of the fund held in unquoted companies, well above the 3.5% stake in the New Horizons fund.
Their portfolio is a top performer, up 103.6% over the past five years, placing it right toward the top of the Multi-Cap Growth sector.
The fund boasts a hefty 9.3% weighting to unlisted firms, with one of them, ride-hailing platform Uber, its fourth largest holding, with a $112 million stake making up 2.7% of the fund. Bought for $35.9 million in June 2014, that represents a return of more than 200% in the space of less than three years.
That big success accounts for a major chunk of the more than $100 million return the fund has made on its existing private equity investments, built up over three years at a cost of $294.3 million.
The Putnam Capital Spectrum fund has an even bigger stake in Uber, making up 3.3%, in line with manager David Glancy’s high-conviction approach, as evidenced by top holding Dish Network accounting for a quarter of the portfolio.
Having bought Uber later than Hartford at a higher valuation, Glancy hasn’t enjoyed quite the same return, with his stake up 30% over two years at £135 million. His investment, meanwhile, highlights the differing approaches to private equity among fund managers: while many look to spread their bets across a number of holdings, as with the T. Rowe Price New Horizon’s 63 investments over the past eight years, Glancy’s Uber stake is his only meaningful venture capital play.
If Uber is seen as an adventurous investment, Citywire A-rated Christopher C. Davis and Danton Goei, managers of the Davis Global fund, have strayed even further from the beaten track through their venture capital investments.
Two of their three unlisted investments are Didi Chuxing, the Chinese ride-hailing platform that bought Uber’s operations in the country last year; and Grab, Singapore’s answer to the taxi app phenomenon.
China’s Internet Plus, the country’s largest food delivery and group buying company, makes up the third, meaning Davis and Goei have looked exclusively to Asia for their venture capital investments, which account for a substantial 7.4% of the fund.
Like Uber, Didi is rumoured to be eyeing an IPO this year, with the next 10 months predicted to yield more in flotation excitement than a relatively quiet 2016. For many mutual fund managers, these offerings will represent the latest stage of their investment journey with the companies rather than the beginning.