U.S. funds already in position to score on Twitter, Alibaba IPOs

Reuters

By Tim McLaughlin

BOSTON, Oct 2 (Reuters) - Five mutual funds run by T. RowePrice Group Inc own $220 million worth of Twitter Inc,opening up a big lead over rival U.S. funds to capitalize on thesocial networking site's expected public stock offering.

T. Rowe's bet on Twitter underscores the strength of thecurrent IPO market, which has fully recovered from the sourtaste left by Facebook Inc's debut in May 2012. Not onlyis social media back in favor, but mutual funds have a fullslate of IPOs to consider for their investors.

And mutual funds have become more adept at securing stakesin private companies before they go public.

Up for grabs in the coming months is a chance to buy a pieceof a little bit of everything: energy companies, China'sInternet juggernaut, stores selling discount coats, and anoffering on Wednesday that included the Empire State Building.

"A lot of people stepped away from the IPO market afterFacebook," said Chris Bartel, chief of global equity researchfor Fidelity Investments, the No. 2 U.S. mutual fund company,noting Facebook's initial price drop after going public. "You'vedefinitely seen the capital markets open up. 2013 has been astory of people getting comfortable with IPOs again."

Twitter is still in the early stages of planning its IPO,which is expected to value the company at up to $15 billion. ButT. Rowe Price funds have taken the largest pre-IPO stakes in thecompany among U.S. mutual funds, according to Morningstar Incdata.

T. Rowe's New Horizons and Growth Stock funds, for example, owned $84 million and $83 million,respectively, in Twitter stock at the end of June, according toMorningstar. The fund company was not available for comment.

Moves by mutual funds to secure stakes in private companiesbefore they go public allow a broader audience of investors topotentially reap outsize gains once reserved for venture capitaland private equity.

But shares in a company can be spread across dozens of fundswithin one mutual fund family, diluting the impact of an IPO'supside and downside, said John Bonnanzio, who edits a newsletterfor Fidelity investors.

Nevertheless, mutual fund investors can get a pop in theirportfolios if the fund managers buy stakes in private companiesmonths and even years ahead of a market listing. The fundstypically get to buy shares at prices below the public offeringprice. And if the IPO stocks rise after their debut, all thebetter for mutual fund investors.

Bartel said it's rare for a high-quality company to gopublic without much investor interest. But that's exactly whathappened with Google Inc's IPO nine years ago.

Disinterest allowed Fidelity and other mutual funds togobble up big allocations of Google's stock, watching it risefrom $85 back then to more than $900 in July.

TAKING THE BACK DOOR

Twitter's IPO is just one in a string of large, high-profileIPOs expected during the next several months. Chinese e-commercegiant Alibaba Group Holding Ltd and hotel operator HiltonWorldwide are among the listings expected to whet the appetitesof Wall Street and retail investors. Shares of Empire StateRealty Trust Inc, owner of the Empire State Building,were up 1.5 percent Wednesday afternoon in their market debut.

While some U.S. mutual funds already have made directinvestments in Twitter, they are going through the backdoor tocapitalize on others before IPOs.

Funds with big stakes in Japan's Softbank Corp andYahoo Inc, for example, hope to capitalize on Alibaba'ssurging growth. Softbank and Yahoo each own large stakes inAlibaba and their shares have risen already on optimistic talkabout the Chinese company's IPO.

Three funds of American Funds, led by the EuroPacific GrowthFund, owned a combined 9 percent of Softbank's stockat the end of June, according to Thomson Reuters data. Mutualfunds also will get a chance to participate directly in theAlibaba IPO, which could launch in New York or Hong Kong.

Last year, several dozen T. Rowe Price funds held a combined5 percent stake in Facebook Inc Class A shares before thesocial media company went public last year. Facebook's stocktumbled after its debut. But the stock is now trading above $50a share, or 32.5 percent above the IPO price, outperforming theS&P 500 Index by 5.5 percentage points during that span.

Bankers are pushing companies to go public now because thestock market is in a receptive mood for new names.

Fidelity's Bartel said private equity firms also are readyto sell their stakes in companies that were not ready for primetime in the wake of the 2008 financial crisis.

"We're now in the harvesting phase," he said.

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