It used to be that a unicorn was a mythological animal resembling a horse but with a pointed horn sticking out of its forehead. In 2013, seed-stage investor Aileen Lee coined the phrase “Unicorn Club” in a study Cowboy Ventures did on large startup exits. The term stuck. Today, it’s a big part of the venture capital lexicon.
TechCrunch magazine says there are 193 private companies around the world with post-money valuations of $1 billion or more, with Uber being the highest at $62.5 billion and a staggering average valuation of $3.7 billion. Unicorn valuations are growing so rapidly that actively managed mutual funds can’t resist getting on board.
It’s a trend that’s growing despite concerns mutual funds shouldn’t be investing in private companies due to their inherent lack of liquidity that could force fund managers to sell stocks in a downturn to meet redemptions, while simultaneously having to mark down private company holdings. It’s a double whammy that risk-averse investors are best to avoid.
However, mutual funds with investments such as Uber and Pinterest in their holdings have been able to deliver some market-beating returns because of those bets, so investors can expect more mutual funds to get on the pre-IPO bandwagon.
For those who see the benefit of owning an actively managed portfolio that expands its horizons beyond public companies, these three mutual funds could be exactly what the doctor ordered.