Fidelity
Corrals the Largest “Unicorn Herd” – Other Mutual Funds Join the Party
by the Curmudgeon
Overview:
Surprise! The largest portfolio (i.e. number) of
start-up companies valued at over $1B (aka “unicorns”) is not a venture capital
or private equity firm. It’s the huge,
privately held Fidelity brokerage/mutual
fund company. Fidelity Investments owns
a piece of 24 such companies and is # 1 in a ranking posted
Tuesday, September 20th by investment research firm PitchBook
Data.
Other mutual funds among
PitchBook's top 21 investors in U.S. unicorns include T. Rowe Price at # 5 with
17 and Wellington Management in a tie with Google Ventures at # 7 with # 14. These and other mutual fund companies (which
previously only bought publicly traded stocks) have made significant
investments in richly valued private companies in an effort to reap the kinds
of gains they used to be able to get buy buying at or shortly after an IPO. More details below.
A Unicorn dancing by the light of a
crescent moon and stars
………………………………………………………………………………..
PitchBook said in its report
that the pace of creation of new unicorn companies has slowed significantly as
the IPO window has tightened over the past year. Chances of the unicorn herd
being thinned by M&A also seem to be growing.
Mutual Funds Join the Unicorn Party:
Mutual funds invested in
unicorns publicly adjusted their valuation estimates downward on some of these
investments, especially during the stock market correction late last summer and
again early this year. Often, they came
up with different valuation numbers than one another for the same
security. For example, Fidelity and
Wellington are both investors in Uber, but arrived at different valuations for
that company which today has a paper worth of about $68 billion.
Fidelity, T. Rowe Price and
Wellington are all investors in Airbnb, which is valued at approximately $30
billion
Here is PitchBook's full
ranking of the investors with the biggest portfolios of unicorns:
· Fidelity Investments: 24.
· SV Angel: 23
· (tie) Sequoia Capital: 20 and
Andreessen Horowitz: 20
· T. Rowe Price: 17
· Kleiner Perkins Caufield
& Byers: 16
· (tie) Wellington Management, and GV
(formerly Google Ventures): 14
· (tie) Goldman Sachs, and New
Enterprise Associates: 13
· (tie) Tiger Global Management, Khosla
Ventures: Institutional Venture
Partners, Founders Fund, and Accel Partners: 12
· (tie) Salesforce Ventures and General
Catalyst Partners: 11
· (tie) Insight Ventures, Greylock Partners, Comcast Ventures, and Benchmark: 10
"The list of companies
that can buy unicorns is short, but the incentives can be compelling for many,
ranging from revitalizing core businesses with new product lines to economies
of scale," PitchBook wrote in its free report.
There are now 175 unicorns
with a total cumulative Valuation of $626B. You can find an up to date list of
unicorns, their current valuation and list of select investors here.
Curmudgeon Comments and Opinions:
We’ve many times written that
unicorns were the biggest financial
bubble of recent times – perhaps ever!
Please review these posts:
In Search of Unicorns and
One-Trick Ponies: Bubble In Private Tech Start-Ups
Unicorn Valuations Quadruple
– Now Worth Almost $500B!
Bubble Bubble
on the Wall, Which is the Biggest Bubble of Them All?
Unicorn Year in Review: Party
May Be Over For Tech Start-ups!
Obviously, the party is still going
on but at a more subdued pace as the pace of unicorn formation has slowed
dramatically. That’s depicted in this
chart from the aforementioned PitchBook report
Source: PitchBook, *As of
8/31/2016
…………………………………………………………………..
Almost all of these unicorns
refer to themselves as “tech” companies, but in reality they don’t make any
real, tangible products. They are mostly
software and services firms, with a few developing algorithms that run on cloud
computing software platforms. How can Uber
or Airbnb be called “tech” companies
when they only design and code mobile apps?
The reason these richly
valued “start-up” companies have stayed private is that the IPO window has been
mostly closed. Just one venture-backed
tech company, Twilio,
gone public in 2016, compared to an average of 37 per year between 2001 and
2015.
In a fascinating blog post,
Ravi Mhatre of Lightspeed Venture Partners wrote:
Consider
that the global economy has essentially been flat over the past several years;
global GDP actually shrank during 5 consecutive quarters between 2015 and 2016.
And despite seemingly low unemployment rates in the U.S. today vs. what they
were during the recession of 2008–10, many remain out of work while others are
stuck in jobs with stagnant salaries. You don’t have to look far past the
election rhetoric to understand why so much social unrest and turmoil persists
here and abroad.
Contrast
that sentiment to this herd of fantastically valuable, fast-growing tech
startups, and it’s no wonder the world outside Silicon Valley isn’t buying into
the pitch. People are suspicious that any company could be on a path of radical
growth when they’re treading water at a job for 15 years and haven’t seen a
raise in the last five. Unicorns, lest we forget, are mythical beasts. Why
should people believe?
Mr. Mhatre believes that tech
IPOs aren’t coming back anytime soon. “While Silicon Valley watched the paper
fortunes of these magic (unicorn) companies go higher and higher (until
recently), the rest of the world was more or less treading water — or
drowning.”
Conclusions:
When will unicorn valuations
start to really ratchet down? We thought
for sure this year had kicked off a long overdue global bear market that would
shatter unicorn valuations. When that
happens, the mutual fund companies that own unicorns and other private
equity/start-ups will take huge write-downs and impairment charges, which we
believe will be substantially greater than 50% of their current valuations.
While we were wrong on the
timing for the unicorn bust (thanks to even further easing by global central
banks), that day is not too far in the future.
It will take a mistake, accident - some unknown or unanticipated event
to pop the many prevailing financial asset bubbles, which will in turn shatter
the unicorn mega bubble. When that
happens, many mutual fund investors will be deeply shocked their funds (which
own private companies) have gone down more than the popular market averages.
Here's a hint
of what might become of many unicorns, as reported by the San Francisco
Chronicle in a front
page article this past Sunday:
Brisbane’s Mode Media has abruptly shut down, leaving bloggers
unpaid, investors frustrated and rumors swirling in its wake.
Good luck and till next time...
The
Curmudgeon
ajwdct@sbumail.com
Follow the
Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been
involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a
historian, economist and financial innovator who has re-invented himself and
the companies he's owned (since 1971) to profit in the ever changing and arcane
world of markets, economies and government policies. Victor started his Wall Street career in 1966
and began trading for a living in 1968. As President and CEO of Alpha Financial
Technologies LLC, Sperandeo oversees the firm's research and development
platform, which is used to create innovative solutions for different futures
markets, risk parameters and other factors.
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