Morningstar - Q1 2023 - 35

EXHIBIT 1
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.
Current State of Private Equity Investing
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's rare for
funds to place more than 10% of assets in
private-firm equities, but it happens. As of June
2022, Baron Focused Growth BFGFX held
11.7% of assets in SpaceX, which it has owned
since September 2017 ( EXHIBIT 2 ). T. Rowe
Price New Horizons PRNHX, the largest non-Baron
holder of private-firm equities, spread its
8.8% stake across 51 companies.
Cautionary Tales
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.
WeWork
The WeWork WE fiasco of 2019 caught many
funds off guard. The coworking company became
a popular holding in 2014 when funds from
eight mutual fund families initiated positions at
$15 to $16 per share. Some funds later valued
their WeWork stakes to reflect paper gains
of 300% to 600%. Concerns about the company's
governance and CEO Adam Neumann's conduct
surfaced in 2019, and the much-anticipated
IPO was eventually canceled. Fund companies
began slashing their valuations. By March
2020, for example, T. Rowe had written down its
shares to $3.60, nearly 80% from what it paid
and 95% from the shares' late 2018 apex.
Eventually, WeWork went public in October 2021,
but it was still a failure for the mutual funds
that owned it.
Private Heavyweights Fidelity and T. Rowe Price account for most of the mutual
fund assets invested in private firms.
1.00
Fidelity
0.75
0.50
0.25
3/31/07
3/31/10
Source: Morningstar Direct. Data as of June 30, 2022.
3/31/13
3/31/16
3/31/19 6/30/22
Investments
T. Rowe Price
Hartford
Mutual Funds
Morgan Stanley
Others
EXHIBIT 2
Largest Owners Baron Focused Growth's private equity stake was in one company,
SpaceX. In contrast, T. Rowe Price New Horizons spread its stake across 51 firms.
$150
PRIVATE
COMPANY
Fund
100
Baron Focused Growth BFGFX
Baron Partners BPTRX
T. Rowe Price New Horizons PRNHX
50
Neuberger Berman Large Cap Growth Inv NGUAX
T. Rowe Price Small-Cap Value PRSVX
T. Rowe Price Small-Cap Stock OTCFX
T. Rowe Price Instl Small-Cap Stock TRSSX
Fidelity Advisor Growth Opps FAGAX
Baron Opportunity BIOPX
2020
2021
T. Rowe Price Growth Stock PRGFX
Source: Morningstar Direct. Data as of June 30, 2022.
Fidelity New Millennium Fund
Baron Asset Fund
Fidelity Advisor New Insights Fund
Fidelity Mid-Cap Stock Fund
Franklin Small-Mid Cap Growth Fund
Fidelity Ser Opportunistic Insights Fd
Fidelity Contrafund Fund
Fidelity OTC Portfolio
Fidelity Growth Company Fund
Fidelity Blue Chip Growth Fund
Baron Partners Fund
Didi Global
One fund family let more ride on Didi Global than
others. Davis Global Advisors had bought
stakes in the ride-hailing firm for several of its
funds by June 2016 at $9.56 per share and added
to the positions later. The Didi stake of
Davis Opportunity RPEAX, for example, stood
as high as 4.6% in March 2020, on top of a
5.2% stake in Grab, a Singapore-based ride service
Franklin Growth Opportunities Fund
American Funds Growth Fund of Amer
Percentage of Portfolio
11.7
2022
11.4
8.8
7.3
6.7
5.8
5.7
5.3
5.2
4.3
Number of Holdings
1
4
Rivian
Share Price
34.30
51
10
38
37
35
44
5
17
21.16
21.03
20.61
in which Didi invested. Its total private-firm
equity stake was almost 13%-near the SEC's 15%
limit. Shortly after the June 2021 IPO at $14 per
share, the Chinese government put the company
under cybersecurity review and forced its
apps out of service, rocking the stock. By the time
the conventional 180-day lockup period ended
in December 2021, the stock traded at nearly half
what Davis first paid for it. Davis Opportunity
18.28
8.35
7.77
7.09
3.03
morningstar.com/products/magazine
-16.75
-5.46
-12.43
-12.62
-13.62
35
IPO LOCKUP PERIOD
POST-LOCKUP
Share Price
Percentage of Total Private-Firm Assets
in Mutual Funds
https://www.morningstar.com/funds/xnas/bfgfx/quote https://www.morningstar.com/funds/xnas/prnhx/quote https://www.morningstar.com/stocks/xnys/we/quote https://www.morningstar.com/funds/xnas/rpeax/quote http://www.morningstar.com/products/magazine
Morningstar - Q1 2023

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