Who says you're shut out of Wall Street's private deals?
More and more mutual fund managers are bypassing the markets and buying stock directly from public and private companies.
Today's Saturday Screen sifts for mutual funds with a penchant for making these kinds of investments.
In some cases, funds are getting below-market prices for public companies. In others, they're buying stakes at ground-floor prices in promising private companies before their initial public offerings.
"Today investment management companies are more interested in purchasing private equity," says Syl Marquardt, director of research at
John Hancock Funds
. "The 'New Economy' stocks are leading the way and competition to get a decent position in these companies is high among mutual fund complexes. There's more risk involved, but it can pay off."
Since these deals give the company cheaper, quicker access to capital than an IPO, the fund often gets in at a cheap price. The risk for the fund, of course, is that it's often harder to sell private stakes than it is to trade common stock on a major exchange. Typically, a fund either has to hold the shares for a while until they're registered for trading or sell them to another institution.
For fund companies, these deals are the equivalent of a home-run swing. Sometimes they work out, sometimes they don't, which is why they aren't usually a big part of a portfolio.
Earlier this month,
IAI Growth & Income had to
close to new investors while fighting a lawsuit over its pre-IPO stake in
Even private placements of stock in a public company can be hit or miss. That's illustrated by two recent PIPE deals, short for private investment in public equity.
Janus took a $930 million stake in
shares, which are almost 50%
And in February, Janus and three other fund companies,
, agreed to pay $12 a share for
. The stock closed Friday at 20 1/16.
We screened for diversified domestic stock funds with the biggest stakes in private/illiquid positions, according to
. We also threw in tech, telecommunications and health care funds because of investors' keen interest in those three sectors.
Before we go any further, a couple of caveats. First, none of these funds is betting the farm on illiquid securities, so making the list isn't reason to hit the panic button. Second, this information is based on the funds' most recent shareholder report, so holdings may be different today. That said, the list provides an intriguing glimpse into an obscure part of some funds' anatomy.
Let's start with the
funds because -- let's be honest -- they're a gimme. Portfolio manager Garrett Van Wagoner's focus on companies in the early stages of their life cycle is renowned. Plus, wouldn't you expect a fund with a name like
Post-Venture to have some private holdings?
About four years ago, Van Wagoner started investing in pre-IPO companies. That's because he and his colleagues began to research private companies to trace new trends in tech and communications.
"Private companies are a huge part of our research, but a small part of our portfolios. Every once in a while, we find a diamond in the rough," says Peter Kris, a Van Wagoner managing director.
Van Wagoner doesn't typically buy part of a private company until it's fairly mature and nearing an IPO, Kris says. That was the case with business-to-business software provider
, which it first bought in 1997, two years before its June 1999 IPO. He says Van Wagoner bought more at the IPO and has kept buying it since. The stock has jumped more than 2,200% from its IPO price -- a home-run swing if there ever was one. That kind of payoff shows why a fund doesn't have to commit a mountain of money to a private holding to boost returns.
But making the list doesn't mean a fund has fat positions in tiny, private companies.
Most made the list because of 144A holdings, which are equity or debt shares that a public or private company offers only to institutions. Typically, the shares can be traded only among institutions, too, which is why
classifies them as illiquid even though the market for many of these shares is often brisk.
They're named for
Securities and Exchange Commission
rule 144A, which defines how much information the issuer has to provide buyers.
Many funds made the list because of institutional-only shares of foreign companies that don't trade on U.S. exchanges. That's the case with
Janus Special Situations,
Lindner Large Cap and
Green Century Balanced. These funds have one to three foreign 144A holdings.
Janus Special Situations, for instance, had 2.77% of its fund at year-end invested in
, a large, high-profile Indian textile and chemical concern that trades on the
. Green Century Balanced had 2.8% of its portfolio bet on
Vestas Wind Systems, a Danish wind-turbine manufacturer trading on the
Copenhagen Stock Exchange
Ditto for the list's three sector funds, which use most of their modest private stakes to invest in companies everywhere from India to Poland to Japan. The only exception is
Eaton Vance Worldwide Health, which had 0.6% of its fund invested in
, a privately held Cleveland, Ohio, software concern that focuses on the biotech industry.
That leaves us with
, which runs
Smallcap World and
Initially, it might be a surprise to see American Funds on the list. At year-end, the conservative $318 billion fund shop had 38 securities Morningstar classifies as private or illiquid in the $13 billion Smallcap World fund and nine in the $11 billion New Economy fund. But, relax, it looks like nearly all of these are 144A shares in public foreign companies like Smallcap World's 0.6% position in British cable-manufacturer
It's hard to tell if such holdings as
, which went public last year, were pre-IPO purchases, but it does happen.
"We do invest in companies before they go public," admits American Funds spokesman Chuck Freadhoff. He says the firm always considers the liquidity risks when it buys pre-IPO and 144A stakes.
So, there you have it. Now you know what's going on when you look at your fund's shareholder report and some of the holdings don't have tickers or are labeled illiquid or restricted.
And maybe you can walk a little taller, knowing you've got a toe in the institutional pool.