As ride-sharing company
Lyft closes in on its initial public offering, financial advisers and investors could be surprised to learn they might already own a piece of the company through a mutual fund.
According to Morningstar, there are
36 mutual funds that currently own a stake in Lyft, which isn't expected to start trading as a public company until Friday morning, after raising more than $2 billion through an initial public offering of more than 30 million shares of stock.
The funds' investments in
Lyft are all less than 1% of assets and won't likely move the needle regardless of how much pop the closely watched IPO enjoys. But the fact that some portfolio managers see an opportunity to invest in private companies shows a unique strategy.
Even though it is allowed, it is rare for mutual funds to invest in private companies, according to Morningstar director of manager research Kate Rushkewicz Reichart. She calculated that only 3.6% of all equity and allocation mutual funds had any
exposure to private companies. And of those funds, most cap the exposure at around 2%.
While there is obvious upside potential of owning a private company headed for the public markets, the biggest risk comes down to their illiquid nature, since shares can be difficult to sell if a fund faces liquidations.
"Private stakes can't be easily sold, so that means private stakes can become higher percentages if a fund has to sell other more liquid positions," Ms. Reichart said. "There can be some trading on the secondary market, but for the most part an IPO is the only liquidity when you own a private company."
In the case of Lyft, which is already oversubscribed, it looks like the bet worked out for those 36 funds, 35 of which are managed by Fidelity Investments.
A Fidelity spokeswoman said the company does not comment on specific fund positions.
For advisers and investors curious about whether a mutual fund is dabbling in the private-company space, the best strategy would be to dig deep into a fund's public filings and start at the bottom of the list of fund positions because private companies will never make the top 10 positions.
Among the funds on the list, Fidelity Flex Large Cap Growth Fund (FLCLX) has the largest percentage weighting in Lyft, representing 0.74% of the fund's $20.5 million in total assets.
On the other end of the spectrum, Lyft represents 0.01% of the $4.9 billion allocation fund Fidelity Asset Manager 20% (FASIX).
"It's an under-the-radar situation and it would be rare for a fund to have more than a 1% allocation to a private company," said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.
Mr. Rosenbluth added that an advantage to owning a piece of a private company is potential access to executives and financial data that wouldn't be otherwise made available to non-investors.
"There's strong potential reward for owning private companies that then become public in that they typically go public at a premium, and early investors tend to benefit from that," he said. "These positions in private companies are anomalies. Investors wouldn't expect to find them, but there are a lot of holdings that investors wouldn't expect to find in a fund. And because they are private, it's not as transparent how the funds value those positions."
