Mutual fund giants aren’t just interested in putting money to work in publicly traded companies. Increasingly, they also want to own a piece of red-hot start-ups.
Analysts at CB Insights recently looked at deal trends among five mutual-fund firms—BlackRock, Fidelity Investments, Janus Capital, T. Rowe Price, and Wellington Management. As the analysts note, outside of Janus, last year was the biggest ever for start-up deals for each of the firms, which completed six to 16 U.S. deals each.
For instance, after no U.S. tech deals in 2013, Wellington Management jumped into 12 deals, including a $71 million investment into real estate tech platform Redfin and a $40 million round into cybersecurity company Veracode.
T. Rowe Price doubled its number of private tech deals into venture-backed start-ups in 2014.
Fidelity, Janus, BlackRock and Wellington did not immediately return a request for comment.
In a statement to CNBC, T. Rowe Price emphasized that the company has always invested in “promising emerging growth companies” that can potentially add long-term value for clients.
The company said it pursues a thorough assessment of the prospects and past performance of the company, which typically includes meetings with management and a review of company financial information.
T. Rowe has also funded headline-grabbing start-ups such as Airbnb and Dropbox, among others.
Despite these funds’ interest in start-ups, investments in private companies usually account for a relatively small portion of a mutual fund’s net assets. For example, at T. Rowe, such investments typically represent less than 1 percent of a portfolio for a single security.
Still, even with such relatively small stakes, these investments can positively goose returns, and funds are hoping start-ups offer big growth that well-established publicly traded companies might not provide.
“This gives the mutual fund company a chance to get in early on a growth story,” said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.
There’s an added benefit as well: Understanding a start-up’s business can provide portfolio managers with more insight about the broader market they’re upending, and what that disruption could mean for publicly traded rivals, said Rosenbluth.
Rosenbluth also highlighted the risks for mutual fund firms, including the fact that start-ups can be challenging to value, and there are liquidity issues to consider.
“These start-ups don’t trade on exchanges,” he said. “So, if these unproven companies struggle, then these mutual fund firms could get caught holding assets or selling at a discount.”
Regardless of such challenges, analysts expect mutual fund managers to keep putting money to work in private technology companies as they look to improve returns.
“We haven’t seen the bust,” said Rosenbluth. “Until a company like Uber struggles this trend will continue.”
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