Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Who needs unicorns?

Concern over valuations of certain tech startups worth $1 billion or more has led mutual funds including Fidelity, T. Rowe Price and BlackRock to write down some higher-profile holdings -- Snapchat and Dropbox being two recent examples. It's no surprise, then, to find that such funds are no longer jumping at the chance to take part in late-stage, pre-IPO fundraising rounds for these types of companies, as this chart illustrates: 

Gillian-tech

Fortunately for fund managers, there is another type of prospective IPO candidate that may be just as eager for their crossover dollars, and worth a look: Older, proven businesses, which have arguably less risk.

On Wednesday came news of just such a situation: WME-IMG, the Silver Lake-backed entertainment, sports and fashion group, said Fidelity had invested $55 million in the company, which owns or operates storied tennis tournaments including Wimbledon and manages athletes such as Lindsey Vonn.

It's interesting timing given the cash infusion comes after a $250 million injection from SoftBank. But considering it had roughly $2.4 billion of debt in 2014 when WME merged with IMG and has continued to buy properties such as the Miss Universe pageant, perhaps its need for cash is justified. 

For private equity owners like Silver Lake, selling stakes in pre-IPO candidates to mutual funds like Fidelity can be a way to earn a return on some of their investment at a time when capital markets have largely been shut. And they can use that money to return cash to investors they may want to tap again in the future. Plus, any stake sale to a mutual fund usually isn't sizable enough to meaningfully dent a private equity firm's overall returns since their remaining equity stake is typically substantial. (In the case of WME-IMG, the company itself  was the seller.)

Mutual funds have made a pretty penny from many of their private company forays to date, and while unicorns such as Facebook and Zynga have tended to take center stage, the tech sector hasn't been the sole recipient of the action. In the summer of 2011, Fidelity and T. Rowe Price invested in Michael Kors, ahead of the retailer's December IPO. 

Making it Public
Shares Michael Kors soared following its December 2011 IPO at $20-a-share. Pre-IPO investors like Fidelity and T. Rowe Price would have amassed their stake at a discount to that.
Source: Bloomberg

Today, even with the IPO market showing signs of life (as evidenced by the performance of BATS Global Markets and MGM Growth Properties), some private equity firms may opt to trim their stakes as they wait for improved market conditions. That may offer mutual funds more opportunities outside of tech, like the one Fidelity found in WME-IMG. 

One possibility? WME-IMG's rival Creative Artists Agency (CAA), which is backed by another private equity firm, TPG. If TPG wants to delay taking CAA public until WME-IMG first tests the waters with investors and sets a benchmark valuation, selling a stake to a mutual fund might be as good a recipe as any. 

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

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net