So far this year, the IPO market has been hot. According to Hoover’s, the amount raised from public offerings increased by 166% in the first quarter (for a total of $12 billion). The best performing IPO was Qihoo 360 Technology (Nasdaq:QIHU), which posted a first-day gain of 104%.
However, it’s not easy to get IPO shares. Besides, the real big gains are for those investors – like venture capitalists – that invest in companies in the early stages.
Understanding these opportunities, some mutual funds are actually investing in privately held companies. And which tech operator is getting the most attention? Facebook, of course.
Last Friday, T. Rowe Price (Nasdaq:TROW) disclosed that it has about $190.5 million in shares of the social networking company. Keep in mind that — as a part of its $482 billion asset base – it’s a small amount. But if the Facebook IPO turns out to be a winner, it could provide some extra juice for returns.
T. Rowe Price has spread the shares across 19 funds. Some include Science & Technology (PRSCX), Growth & Income (PRGIX), Global Stock (PRGSX) and New America Growth (PRWAX). As an indication for its appetite for cutting-edge technology companies, T. Rowe Price also has stakes in Groupon, the daily deal site, and Zynga, which is a fast-growing social gaming company.
Interestingly enough, Morgan Stanley (NYSE:MS) is also bullish on Facebook. It has allocated shares in Focus Growth (AMOAX) and the Capital Opportunities (CPOAX) mutual funds. Then again, the investment bank is angling to be the underwriter on the IPO. It could lead to some lucrative fees.
But there is fierce competition. In January, Goldman Sachs (NYSE:GS) structured $1.5 billion investment in Facebook at a $50 billion valuation. Of this amount, $450 million came from the firm and the funds it manages. But Goldman couldn’t offer the securities to its U.S. clients because the media attention was too intense.
Currently, the shares are sporting a valuation of about $80 billion, which is based on the latest auction from SharesPost. As should be expected, trading has been robust on these virtual trading platforms.
Should you participate? It depends on whether you can clear the barriers. First of all, you will have to show you are an accredited investor (this means you have a high net worth and a hefty salary). Next, the transaction sizes are usually large, say over $100,000, and it can easily take a month to put together a transaction.
Yet it looks like the Securities and Exchange Commission is exploring changes to the regulations to make it easier to trade in privately held securities. But such reforms are likely to take time – if they ever come to fruition.
There is another interesting investor in Facebook: Microsoft (Nasdaq:MSFT). The company made its investment back in 2007. The amount came to $240 million at a $15 billion valuation. At the time, there was much criticism about the deal as the belief was that the valuation was crazy.
It looks like there is something Microsoft can get right these days.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.