Fidelity leads $250 mln mutual fund bet on Dropbox IPO prospects


By Tim McLaughlin

BOSTON, Nov 20 (Reuters) - A group of U.S. mutual funds ledby Fidelity Investments holds a combined stake of nearly $250million in Dropbox Inc, positioning them for a big payoff if thefast-growing cloud storage company can pull off a stock marketdebut like that of Twitter Inc.

Two funds run by Fidelity portfolio manager Will Danoff -Contrafund and Fidelity Advisor New Insights - own stakes in Dropbox valued at $83.1 million, according toMorningstar Inc data.

Danoff is considered one of the best stock pickers in themutual fund industry, with the $106 billion Contrafund beating94 percent of its large-cap growth peers over a 10-year period.Other large mutual fund investments in Dropbox include $47.4million from the Morgan Stanley Institutional Mid-Cap GrowthFund and $38.2 million from T. Rowe Price Mid-CapGrowth Fund, according to Morningstar.

Fidelity and T. Rowe Price declined to comment.Morgan Stanley was not available to comment.

Investments by portfolio managers such as Danoff inearly-stage companies can give them (the companies) an addedmeasure of legitimacy in their run up to an initial publicoffering, said Kathleen Smith, a principal at RenaissanceCapital, an IPO investment firm.

"There is some credibility associated with thoseinvestments," Smith said. "Mutual funds are fiduciaries andthey're seen as the smart money."

Dropbox, an online file-sharing and storage startup based inSan Francisco, is trying to raise $250 million in additionalfunding in coming weeks, according to media reports. That wouldgive the six-year-old company, which was founded by two MITgraduates, a valuation of more than $8 billion.

While mutual funds put the vast majority of investors' moneyinto shares of publicly traded companies, their bets onpromising companies before they hit the stock market recentlyhave yielded some exponential gains.

T. Rowe Price's $14 billion New Horizons Fund, forexample, invested $12.3 million in Twitter, some of it more thanfour years before the company's initial public offering earlierthis month. That small investment is now worth $177 million, or14 times more than the acquisition cost, as Twitter tradedWednesday at around $41 a share.

To be sure, striking gold is not a given when betting onearly-stage companies, which are untested in the rough andtumble world of public stock markets.

Mark Sunderhuse, a founder of Red Rocks Capital and a formerportfolio manager at what is now Janus Capital, said not allmutual funds are set up to find promising young companies intheir early stages.

"They're not all set up to do the due diligence that venturecapital and private equity firms do," Sunderhuse said. "Theinternal expertise generally is not there."

But at Fidelity, for example, there has been a concertedeffort in recent years for analysts to build relationships withthe management of early-stage companies, top Fidelity executiveshave said.

A Dropbox IPO could happen early next year, according toinvestors familiar with internal discussions. They requestedanonymity because they weren't authorized to talk about thetiming.

Smith said there will be further scrutiny of Dropbox asthere are indications the IPO market for tech stocks is showingmore discipline. She said some IPOs have been delayed whileothers have priced lower than what was expected.

"Investors want to see the companies fill in the earningsthat come with some of these big valuations," Smith said.

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