How Has Private Equity Investing Fared for Mutual Funds?
Fund companies have embraced ownership of 'unicorn companies,' with mixed results.
Private equity investing has continued to gain steam and investor interest.
According to PitchBook, the number of unicorns, or private companies valued over $1 billion, has ballooned from 39 in 2013 to more than 1,200 as of September 2022. And while mutual fund investment in these companies has resulted in its share of success stories, it has also yielded disappointments.
This update of Morningstar’s original 2016 “Unicorn Hunting" report assesses the historical trends of U.S.-domiciled open-end diversified U.S. equity mutual fund ownership of private-firm equities between Jan. 1, 2007, and June 30, 2022. It excludes exchange-traded funds and funds of funds.
Mutual fund ownership of private-firm equities exploded in the last decade and a half. At the start of 2007, a little more than $110 million of mutual fund assets were invested in private-firm equities across nine fund families and 14 funds. That number grew to $23 billion in late 2021 before falling to roughly $15 billion as of June 2022 as the broad market declined and a number of widely held private-firm equities went public.
As seen in Exhibit 2, since 2013, Fidelity frequently accounted for more than half of the total mutual fund assets invested in private-firm equities, with its stake growing to nearly $8 billion as of June 2022 from less than $250 million at the end of 2012.
Fidelity's mutual funds, including Fidelity Contrafund (FCNTX), made their first big private-firm equity investment with Dropbox (DBX) in May 2012. Investments in private-firm equities such as Intarcia Therapeutics, Cloudflare (NET), Roku, Pinterest (PINS), Moderna (MRNA), MongoDB (MDB), and Uber Technologies (UBER) followed.
As of June 2022, more than half of Fidelity’s $8 billion in 100 private-firm equities were in just four companies: SpaceX, Fanatics, Circle Internet, and Epic Games. Elon Musk’s SpaceX comprised more than a third of the total stake.
T. Rowe Price’s small- and mid-cap funds, particularly T. Rowe Price New Horizons (PRNHX), were among the first to invest in private-firm equities. The firm's overall private-firm equity stake in its mutual funds rose to a peak of nearly $12 billion in late 2021 from $872 million at the end of 2011 before falling to $5.2 billion as of June 2022, mostly because of Rivian Automotive (RIVN) going public in November 2021.
As Fidelity and T. Rowe Price ramped up their activity in private markets, several firms pulled back. Wellington, which subadvises several Hartford and Vanguard mutual funds, stopped investing in new private-firm equity opportunities in open-end mutual funds by the late 2010s. Meanwhile, Morgan Stanley Investment Management got more selective after some illiquid private-firm equity positions got too big in its small- and mid-cap funds because of outflows.
As of June 2022, 113 U.S.-domiciled, diversified U.S. equity mutual funds across 27 fund families owned at least one private-firm equity, accounting for over $15 billion in total investments. Such investments represented 5.8% of the 1,961 distinct U.S. equity funds in Morningstar’s database.
Most funds maintained modest positions in private-firm equities, with the median exposure just 0.5% of portfolio assets. It is rare to see funds place more than 10% of assets in private-firm equities, though it happens. As of June 2022, Baron Focused Growth (BFGFX) held 11.7% of assets in SpaceX, which it has owned since September 2017.
T. Rowe Price New Horizons, the largest non-Baron holder of private-firm equities, spread its 8.8% stake across more than 50 companies.
Mutual funds' most popular private-firm equity position in dollar terms from 2007-10 was not a flashy startup. Wellington, Goldman Sachs, KKR, and others backed Buck Holdings to take Dollar General (DG) private in 2007.
From 2011 on, though, more of the familiar technology and software household names began to dominate.
The rewards of Facebook (now Meta Platforms (META)) and Twitter's (TWTR) IPOs to mutual funds inspired more fund companies to try private-firm equity investing in the mid-2010s. Ride-share company Uber, which went public in May 2019, was the most widely held private equity holding from 2014 to 2018.
Amid the excitement around investing in private companies, fund companies should still proceed cautiously; several hot companies have collapsed shortly before or after their IPO.
While the blowups make the press, there are plenty of success stories, too.
As the number of unicorns has increased and mutual fund ownership of private-firm equities has grown, it’s worth remembering that not every unicorn will be a home run. The onus is on fund companies to perform robust due diligence upfront and manage risks appropriately.
Jack Shannon does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.