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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 led by Fidelity Investments holds a combined stake of nearly $250 million in Dropbox Inc, positioning them for a big payoff if the fast-growing cloud storage company can pull off a stock market debut 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 to Morningstar Inc data.

Danoff is considered one of the best stock pickers in the mutual fund industry, with the $106 billion Contrafund beating 94 percent of its large-cap growth peers over a 10-year period. Other large mutual fund investments in Dropbox include $47.4 million from the Morgan Stanley Institutional Mid-Cap Growth Fund and $38.2 million from T. Rowe Price Mid-Cap Growth 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 in early-stage companies can give them (the companies) an added measure of legitimacy in their run up to an initial public offering, said Kathleen Smith, a principal at Renaissance Capital, an IPO investment firm.

"There is some credibility associated with those investments," Smith said. "Mutual funds are fiduciaries and they're seen as the smart money."

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

While mutual funds put the vast majority of investors' money into shares of publicly traded companies, their bets on promising companies before they hit the stock market recently have yielded some exponential gains.

T. Rowe Price's $14 billion New Horizons Fund, for example, invested $12.3 million in Twitter, some of it more than four years before the company's initial public offering earlier this month. That small investment is now worth $177 million, or 14 times more than the acquisition cost, as Twitter traded Wednesday at around $41 a share.

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

Mark Sunderhuse, a founder of Red Rocks Capital and a former portfolio manager at what is now Janus Capital, said not all mutual funds are set up to find promising young companies in their early stages.

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

But at Fidelity, for example, there has been a concerted effort in recent years for analysts to build relationships with the management of early-stage companies, top Fidelity executives have said.

A Dropbox IPO could happen early next year, according to investors familiar with internal discussions. They requested anonymity because they weren't authorized to talk about the timing.

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

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