Price funds grant small but exclusive Facebook entree

February 05, 2012|Jay Hancock

Among the elite insiders who got to invest in Facebook before it goes public were several Silicon Valley venture capitalists, a Russian oligarch and the rock star Bono.

Oh, and the shareholders of T. Rowe Price's media and telecommunications mutual fund, who, come to think of it, aren't even close to being elite.

It won't set you up like the Winklevoss twins, who parlayed dubious claims about inventing Facebook into stock settlements that the Wall Street Journal reported are worth as much as $300 million. But if you have $3,000 in T. Rowe's media and telecom fund, you own a Facebook stake valued at about $36 at the end of last year.

You have an inside track on the hordes who won't buy Facebook until it starts trading on the New York Stock Exchange or Nasdaq this year.

Mutual fund companies usually invest in publicly traded stocks and bonds that are easy to buy and sell. But T. Rowe Price and sister Baltimore fund company Legg Mason have a history of making smaller, riskier bets on startups and other alternative investments that aren't usually open to the little guy.

"We're always investing in promising emerging-growth companies where we think we can add long-term value for our clients," says T. Rowe spokeswoman Heather McDonold. "We manage risk by keeping them a small percentage of the funds."

While funds run by Boston-based Fidelity Investments also own Facebook shares, Baltimore-based T. Rowe holds the biggest stake by a mutual-fund company in what may be the most intensely watched initial public stock offering of the decade.

The firm owns 5 percent of Facebook's class A shares and a smaller portion of the company's class B shares. While some of T. Rowe's stake is held for non-mutual-fund clients, Facebook shares in T. Rowe mutual funds alone were valued by the company at $400 million in December.

The Media & Telecommunications Fund owns the biggest single piece of Facebook among T. Rowe funds. But you're also a Facebook shareholder if you've invested in T. Rowe's Science & Technology Fund, its New America Growth Fund, its Global Technology Fund and others. T. Rowe also bought a stake in Twitter, another social-media juggernaut that hasn't yet gone public, in 2009.

If owning privately held technology ventures is unusual for a mutual fund, welcoming investors such as T. Rowe isn't typical for the startups, either. They usually rely on venture-capital partnerships funded by pension funds, university endowments, wealthy individuals and the like.

Federal rules limit how much illiquid, private-equity investments mutual funds can hold. With investors able to buy or sell T. Rowe funds every day, the funds must be able to quickly tailor their portfolios in response. That's hard or impossible when there's no public market for the securities.

"If investors decided they wanted to unload their shares, if a fund had to sell private equity, it's not a liquid market," said Jeff Tjornehoj, a mutual-fund analyst at Lipper. "A name like Facebook might have a lot of takers out there. But not every security that's privately offered is the next Facebook."

At the same time, fund companies must mark a daily price on all their holdings to ensure that exiting and entering investors get a fair deal. That's difficult with nontrading securities such as Facebook and is one reason mutual funds don't own more venture-capital stakes, said Russel Kinnel, director of research for Morningstar.

Another reason is risk. Technology startups have an annoying habit of going bankrupt.

"The basic idea with venture capital is that nine out of 10 investments are a flop, but that one you hope is Groupon or Facebook, in which you are compensated for the nine flops," Kinnel said. "And that's a risky proposition."

Facebook won't be a flop for T. Rowe and its investors. But it won't generate what The New York Times calculated to be the "thousand-fold" return for some of Facebook's early backers. T. Rowe bought into Facebook last year, at a relatively late stage in the social-media company's development. So the price it paid, while likely to be lower than the initial public offering price, was much higher than that charged to the earliest investors.

Facebook signaled its public offering last week by a filing with the Securities and Exchange Commission. Whether public investors make money on Facebook is very much an open question. The stock is likely to trade at a very high price relative to its profits, as investors bet on continued exponential growth.

The company faces numerous challengers, especially Google. There is a risk that it's all just a fad and that people will get tired of inane comments and pet pictures posted by "friends" they hardly know.

The next time you see Bono at Club 55 in St. Tropez, the two of you can sit down and discuss it.

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