Morningstar - Q1 2023 - 34

Strategies
Tracking Unicorns in Mutual Funds
Fund companies have embraced ownership
of private equity with mixed results.
Research
39 What's a Safe Withdrawal Rate Today?
42
5 Things We Learned About
Investing in 2022
46 A Fixed-Income Fund's Cautionary Tale
Quant U
49 Yielding to Inflation
Best Ideas
53
Manager: Small-Growth Veterans
54 Passive: The Alpha Is in the Details
55
Equity: Hit Generator
The numbers show an expanding private universe.
According to PitchBook, 39 unicorns, or
private companies valued over $1 billion, existed
in 2013. That number ballooned to more than
1,200 unicorns globally as of September 2022.
As the trend grew, mutual fund managers,
who traditionally traffic in publicly traded equities,
risked missing companies' most robust growth
periods-the time before they went public.
So, some fund managers expanded their investable
scope to include private-firm equities, though
regulations limit aggregate stakes to 15%
of a portfolio's assets at the time of purchase.
How have mutual funds fared investing in
private firms? To find the answer, we'll look at the
historical trends of U.S.-domiciled open-end
diversified U.S. equity mutual fund ownership of
private-firm equities between Jan. 1, 2007,
and June 30, 2022.1
Firms That Paved the Way
Mutual fund ownership of private-firm equities
exploded in the past decade and a half. At
Private equity has continued to gain investor
interest. Awash with easy funding during
the 2009-20 bull market, many companies opted
to stay private longer rather than face
the scrutiny and regulatory burden of an initial
public offering.
UNICORNS
Jack Shannon and Katie Rushkewicz Reichart
the start of 2007, a little more than $110 million
of mutual fund assets were invested in private-firm
equities across nine fund families and 14 funds.
That number grew to $23 billion in late 2021
before falling to roughly $15 billion as of June 2022
as the broad market declined and a number
of widely held private-firm equities went public.
The number of fund families that owned privatefirm
equities increased threefold, with Fidelity
and T. Rowe Price driving the huge uptick in the
amount invested.
Large fund companies often have the deep
resources necessary to perform the due diligence
private-firm equity investing requires, not
to mention capital to invest by way of their large
mutual fund bases. Some firms have embraced
it more than others, though. Since 2013,
Fidelity frequently accounted for more than half
the total mutual fund assets invested in privatefirm
equities, with its stake growing from
less than $250 million at the end of 2012 to nearly
$8 billion as of June 2022 ( EXHIBIT 1 ).
Mutual fund managers often cite the importance
of keeping tabs on private companies that
could pose competitive challenges to their
public company holdings; some go a step further
and take stakes in companies they think
have compelling prospects and are headed
toward IPOs.
As Fidelity and T. Rowe Price ramped up their
activity in private markets, several firms
pulled back. Wellington, which subadvises several
Hartford and Vanguard mutual funds, stopped
1 This article is based on a paper that updates Morningstar's original 2016 " Unicorn Hunting " report. See Shannon, J. &
Reichart, K. R. 2022. " Tracking Unicorn Companies in U.S. Mutual Funds. " Morningstar white paper. Sept. 21.
34
Morningstar Q1 2023
https://www.morningstar.com/lp/tracking-unicorn-companies
Morningstar - Q1 2023

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