Everyone wants a bit of Uber.

Photographer: Patrick T. Fallon/Bloomberg

Uber Is Raising More Money From Rich People

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Would you invest in Uber at a $62.5 billion valuation without looking at its financial statements? I don't mean, like, reading every word of the notes; I mean, you don't even get "basic financial data such as net income and official annual revenue figures." Sound good? 

Obviously it sounds a bit dumb when you put it like that. Or, not obviously, not obviously at all: Morgan Stanley and Bank of America Merrill Lynch are offering their rich private-wealth clients just that opportunity, as Bloomberg's Julie Verhage reported yesterday, and presumably those clients don't all think it's a dumb idea. It's all in the tone of voice, the emphasis. "Do you want to invest in the hottest of all the unicorns before regular people can?" Sign me up! "Do you want to invest in a private company at a $62.5 billion valuation, but we can't tell you anything about it?" Errrmmm.

But you can say it other ways, too. Like: "Do you want to invest in the T. Rowe Price Media & Telecommunications Fund?" Because last month Bloomberg reported that Uber had "closed investments from Tiger Global Management and T. Rowe Price" as part of a round done at the same $62.5 billion valuation it's seeking from private-wealth investors now, and T. Rowe's latest quarterly holdings disclosure lists about $17 million of Uber stock in its Media & Telecommunications Fund. That disclosure was only released today, meaning that if you bought shares of the fund over the last month, you already invested in Uber at a $62.5 billion valuation not only without seeing the financials, but without knowing you were buying Uber at all.

Of course, less than half of one percent of your T. Rowe investment went to Uber. (I also assume that T. Rowe's managers got to look at the financials. ) Morgan Stanley is offering Uber by means of a new investment vehicle, sort of a one-stock mutual fund called New Riders LP,  with a minimum investment of $250,000 and a minimum net worth of $10 million; Merrill wants at least $1 million from people with at least $100 million. So you could put a somewhat higher percentage of your net worth into Uber through these vehicles than you could through T. Rowe. But, you know. If you're being offered these deals, you are rich. Live a little. 

Buying Uber as a small part of a diversified mutual fund is a very different proposition from buying it as its own investment. If you buy through a mutual fund, not only are you putting only a very small portion of your wealth in Uber itself, but you are also relying on dedicated investment professionals who have your best interests at heart to do the hard work of reviewing Uber's financials and figuring out if it's a good investment at a $62.5 billion valuation. But if you buy now through New Riders, you are also relying on those same dedicated investment professionals. Or at least, the ones at Tiger Global and T. Rowe. They don't necessarily have your best interests at heart -- they have nothing to do with you, in fact -- but they did presumably do their due diligence, and conclude that Uber was worth $62.5 billion, and stump up their own (clients') money at that valuation. They have set the market price for Uber, which is $62.5 billion, and if you want to buy now you get to buy at that market price. If you buy now through Morgan Stanley or Merrill, you are piggy-backing off of their work. You can feel justified in paying that valuation, because they did. There is no overwhelmingly obvious reason to think that their valuation is right, but then, there is no overwhelmingly obvious reason to think that your valuation would be better if you got to look at the financials. Why not trust T. Rowe? T. Rowe's customers did.

Actually, you don't even have to trust T. Rowe, because, in the absence of financial disclosure, Morgan Stanley straight up vouches for Uber:

"Given the Company's sustainable competitive advantages, large market opportunity, and growth prospects of the Company, the Investment Team believes that the pre-money equity valuation for the Company of $62.5 billion or $48.772228 per share is reasonable," the offering says.

You won't find an equivalent statement in, say, the Facebook initial public offering documents. As a former securities underwriter, it makes me nervous just to see it in print.  Underwriters obviously have a role in setting the price of a securities offering, but they like to stick to the formal notion that the price is set by negotiations between the issuer and the investors; the underwriters intermediate those negotiations but don't actually judge whether the price is fair. But this is a weird offering: Morgan Stanley isn't offering Uber shares, but rather shares in that one-stock quasi-mutual fund New Riders, and the investment team at New Riders is then investing the money in Uber. And since that investment team has to have its investors' interests at heart, it had better think that the valuation is fair. Otherwise the whole contraption can never leave the ground.

And so much of the disclosure in the 290-page offering document is apparently about New Riders, a boring shell for owning stock, rather than Uber, a fascinating innovator in self-driving cars and precarity and Objectivism. And investors will get "unaudited semiannual financial statements," but again, those will be the financials of New Riders -- which you could write yourself, on a napkin -- rather than of Uber. It's a silly minimalist quasi-mutual fund, but it gets the job done. The job of letting private-wealth customers invest in Uber without financial disclosure.

Although there's a little financial disclosure. For instance, Morgan Stanley won't tell you Uber's price/earnings ratio, but it will tell you that it's negative. ("The Company has incurred significant net losses since inception," says a risk factor. ) So if you are a disciplined value investor who will only buy companies at a P/E ratio below 15, maybe give this one a pass.  If you are buying Uber, it is for the dream of Uber as a company that will change and dominate the world, not for its current reality as a money-losing car-service app. And the financials are mostly relevant for the latter.

Also there is, like, no law that you have to look at Facebook's financials before you invest, and I have a sneaking suspicion that many of the retail investors in its initial public offering probably didn't.  You can read Morgan Stanley's omission of financials from this Uber deal as a green initiative to save paper by not printing financials that no one would read anyway. The sexy tech companies of the moment, public or private, are not necessarily bought based on their current financial statements.

I like to say that the private markets are the new public markets, but it is perhaps more accurate to think of them as the new old public markets. Offering shares to retail investors with no financial disclosure is nothing new! Companies used to do it all the time! Then there was a Great Depression, and financials became rather strongly expected (by which I mean, legally required). In the subsequent decades, more expectations grew up, many of them enshrined in law, expectations about things like shareholder rights and corporate formalities. The public corporation was standardized around a model that worked pretty well. And pretty much the only way to be a big company was to be a public company, so that standard model imposed itself broadly.

But in recent years it's become much easier to get pretty much whichever advantages of the public corporation you want -- bigness, name recognition, investment-banker attention, regular access to massive amounts of capital from mutual funds and retail investors, liquidity for employees and early investors -- without the things that you don't want -- activists, short sellers, volatility and, sure, financial disclosure. The rules that everyone thought were binding aren't binding anymore. You want to raise billions of dollars from investors but keep control of your company, limit financial disclosure and have approval rights over who gets to buy? Sure, you can do that now.

One possibility is that this is a great secular turn against the last 80 years of corporate standardization: Driven by factors technological (electronic marketplaces), financial (wealth inequality, massive asset managers, increasing importance of tech companies with relatively low capital intensity) and philosophical (a startup culture celebrating founders and failure, Ayn Rand), tech companies have disrupted the normal standards of corporate governance in ways that those standards will never recover from. The Jobs Act, crowdfunding, Nasdaq's blockchain for private companies: You could view all of them as concessions by the old rulemakers to an inevitable de-standardization of how big companies deal with investors. Now the only rules are those of supply and demand; the only limit on your ability to raise money without governance rights, without a promise of liquidity, without even financial statements, is investors' willingness to give you that money. For Uber that is not much of a limit.

Or maybe it is just a mistake, a regulatory arbitrage that will eventually close. Conor Sen tweeted that "selling shares to retail investors without disclosing financials is a good way for regulators to take your ball away," which is pretty much the story of the Securities Act of 1933. And there are a few small signs of pushback already: The Securities and Exchange Commission, is considering raising the requirements to be an "accredited investor" who can invest in private offerings like this one, and the story of the Good Technology employees who were paid partly in private stock that turned out to be worthless struck a nerve with a lot of people. 

Which view wins out may just turn on how investors do. If unicorns have really replaced public companies as the place where corporate America innovates and creates value, if they are huge wealth generators for their owners, then it will be tough for regulators to limit who gets to own unicorn stocks. If we're in a massive tech bubble and it pops, and employees and (rich, but) retail investors lose everything, then in hindsight the lack of disclosure is going to look extra bad, and the rules that worked for public companies for 80 years will again look as relevant as ever.

  1. At a price per share of $48.77, corresponding to that $62.5 billion valuation. Other T. Rowe funds might also hold Uber; this is the one I found.

  2. Similarly, if you bought shares of the Fidelity Blue Chip Growth Fund two months ago, about 1 percent of your money was going into shares of Uber at about a $50 billion valuation.

  3. If they didn't, then everything I have ever believed in is a lie, and I quit, and they should too.

  4. Get it? Get it? GET IT?

  5. And you are pretty close in time to their decision. I mean, you're like a month and a half away, but that's not so far for a private market that doesn't trade that much.

  6. I'm not alone. Pseudonymous financial Twitterer Ivan the K worries about this offering "as a franchise matter," and writes:

    I can imagine the fights between the bankers and the senior brokerage management on this one. "We need to do this to get the IPO business!"

    That's probably about right, though I imagine there are plenty of people on the brokerage side who like the idea of being able to offer their high-net-worth clients shares in the hottest private company since Facebook.

  7. In the extremely nontechnical sense; it's not a '40 Act mutual fund at all.

  8. Here.

    • Balance sheet: Assets = shares of Uber that New Rider buys times current valuation, which, since Uber is constantly raising money, is always publicly available. Liabilities = none to speak of (I hope? Maybe it's a levered Uber fund?), just investors' equity.
    • Income statement: Income = 0.25 percent annual performance fee. Expenses = paying that fee to Morgan Stanley.
    • Cash flow statement: Same. (Actually perhaps the fee is capitalized upfront rather than paid by investors annually, I don't know, but whatever.)
  9. Previous financing rounds did include financial information, which confirmed that Uber loses quite a bit of money.

  10. I mean, technically negative whatever is lower than 15, though I doubt that argument will appeal to too many disciplined value investors.

  11. To get a sense of the Facebook frenzy, take a look at this article from around that time. It includes an analyst saying "Half the people talking about the Facebook IPO probably don't know what IPO stands for," and then, much further down, a retail investor complaining that "Initially Over-Priced is what IPO should stand for." That's not even the right order of the letters!

  12. Not really. It's not like they're reading the rest of the 290 pages either. 

  13. These facts have some arguable relevance to debates about whether Uber, unicorns, tech, etc. are in a bubble, if you are interested in those debates.

  14. Sort of.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net