A laundry list of high-profile fund shops have invested millions in a private optical networking shop, highlighting the growing role private or venture capital investments are playing in the fund world.
On Tuesday, private San Jose, Calif.-based optical networker
Centerpoint Broadband Technologies
announced that it had raised $130 million in funding from several investors including fund shops
Amerindo Investment Advisors
Firsthand Capital Management
Pilgrim Baxter & Associates
, adviser to the
Investing in private companies entails unique risks for mutual funds. Unlike investments in publicly traded companies, these stakes aren't liquid and these fledgling companies are often less stable than publicly traded firms in the same industry. Centerpoint, for instance, was only founded last year, according to the company's news release.
Traditional open-end funds are typically only allowed to commit up to 15% of their assets to private or otherwise illiquid securities. Most funds stay well below that ceiling. Putnam officials confirm that its shares in Centerpoint will be added to the portfolios of one or more mutual funds, but other fund shops may be adding these shares to private accounts.
The risks can be justified, though. Investing in private companies can give fund shops a ground floor opportunity if the company blossoms and is eventually bought by a big competitor or goes public via an initial public offering, or
IPO. Beyond potentially boosting returns, these early investments can often give fund companies an inside track on getting IPO shares.
Over the past few years, fund companies have increasingly dipped into the private of venture capital market to boost returns and look for the next start-up with a giant-killing product. Tuesday's announcement says that Putnam, the nation's fourth-largest fund shop, with more than $250 billion in its stock and bond funds, has invested $170 million in private companies since February.
Investors have caught the venture capital, or VC, fever recently, too. Fund companies
have launched several closed-end funds that invest significantly in private companies. Unlike traditional open-end funds, closed-ends have a finite number of shares, which they don't have to redeem for cash upon request, making liquidity less of an issue.
Back in March
sifted for funds that commit the
highest percentage of their assets to illiquid investments, including private equity.