T Rowe Price’s flagship small companies fund has revealed annualised returns of nearly 35 per cent from its private investments, rebutting critics who argue that mutual funds should eschew riskier, unlisted companies.
With more companies delaying stock exchange listings due to the abundance of venture capital and onerous requirements of being a public company, asset managers have begun to invest more aggressively in private groups such as Uber and Pinterest.
Such an approach by large institutional investors has raised concern that it exacerbates frothy valuations, and blurs the line between private and public markets. It also exposes mutual funds to liquidity risks given the difficulty in valuing unlisted companies or when they try and sell private holdings.
In its annual letter to investors, T Rowe Price’s $17bn New Horizons fund for the first time provided more transparency about its $1.2bn of investments in 63 private companies since 2009, noting annualised weighted returns of 34.8 per cent. Previously the fund merely provided a list of individual investments, the purchase price and current valuations.
While the letter admitted that “any early-stage growth investment — especially a private investment — carries a high level of risk”, it argues that it helped the fund understand industries under disruption and was a valuable contributor to returns.
“We felt there was enough of a record now that it was an appropriate time to share it,” Henry Ellenbogen, the fund’s manager, told the FT. “We feel our strategy adds value to shareholders.”
Private investment has helped New Horizons beat 97% of its peers over the past five years, according to Bloomberg data
Private investment has helped New Horizons beat 97 per cent of its peers over the past five years, according to Bloomberg data, and it has 28 investments valued at $836m in its portfolio.
Morningstar last autumn counted 194 US mutual funds that have invested in 133 private companies, with their overall holdings valued at $11.5bn. Fidelity is the biggest investor in unlisted companies, according to the study, followed by T Rowe Price and Hartford.
“Mutual funds provide daily liquidity that allows investors to contribute or withdraw money each day, so the inclusion of less-liquid private firms has come under scrutiny,” the data provider noted.
A lot of the criticism peaked in early 2016, and Mr Ellenbogen said that this year’s letter was the first chance to address some of the concerns. Moreover some mutual funds active in private markets are now stepping gingerly back, so the fund manager thought it was “timely” to assure investors and investments that it remained committed to unlisted companies.
The New Horizons fund has won big on early investments in companies such as Twitter and GrubHub, and still holds a $79m stake in the latter. But the letter also revealed a few duds along the way.
The 2012 vintage of investments badly undershot its return target, gaining only 5.5 per cent, three of its 63 private investments since 2009 have been marked down to zero and last year it slashed the estimated value of its investments in Evernote, a once high-flying business software company.
New Horizon’s private investment activity dropped off last year, but Mr Ellenbogen expected a recovery in 2017. “We’re still looking at the same rate. The market feels more active and valuations have come down slightly,” he said.