IPO: Buying private stocks before they go public

By David Pye, Clearfacts, May 19, 2011

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From Facebook to Twitter, stakes in private companies are being quietly gobbled up by mutual funds, which analysts suggest could offer substantial pay-offs in the event that those companies go public through an Initial Public Offering (IPO).

On the flip side of the same coin, however, analysts warn that mutual funds face the risk of encountering valuation and liquidity problems when they invest in start-ups, according to a recent Wall Street Journal report.

Interest in private companies has grown in the wake of less explosive IPOs, with a new trend emerging that is seeing Internet companies stay private for longer periods of time.

If and when such a company does go public, however, a mutual fund with a stake in that company stands to gain from higher returns.

Morgan Stanley Investment Management and T. Rowe Price Group Inc. both hold small quantities of Facebook shares, while shares in Radia Communications and Global Locate doubled in value when they went public, in 2003 and 2007, earning substantial returns for Firsthand Funds.

However, consumers hoping to uncover such investment opportunities will likely have to read through every last detail of a fund’s filings in order to do so.

As a good starting point, it may help to know that private company shares are far more likely to be found in mutual funds that specialize in:

  • Small or midcap stocks;
  • Growth stocks;
  • Technology and/or communications sectors.

Even then, experts warn that introducing securities trading to the liquidity of the mutual funds market can complicate the entire structure, as evidenced by Securities and Exchange Commission (SEC) investigations into allegations of mutual funds deliberately undervaluing their private holdings.

The right balance, experts suggest, is best achieved when mutual fund managers adhere to the KISS principal, essentially keeping their holdings of private securities to a minimum.

Read this article at :
http://www.clearfacts.ca/investments/other_investments/ipo_buying_private_stocks_before_they_go_public

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