US funds in position to score on Twitter, Alibaba IPOs

Five mutual funds run by T. Rowe Price Group Inc own $220 million worth of Twitter Inc, opening up a big lead over rival U.S. funds to capitalize on the social networking site's expected public stock offering.

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

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

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

"A lot of people stepped away from the IPO market after Facebook," said Chris Bartel, chief of global equity research for Fidelity Investments, the No. 2 U.S. mutual fund company, noting Facebook's initial price drop after going public. "You've definitely seen the capital markets open up. 2013 has been a story 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. But T. Rowe Price funds have taken the largest pre-IPO stakes in the company among U.S. mutual funds, according to Morningstar Inc data.

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 to Morningstar. The fund company was not available for comment.

Moves by mutual funds to secure stakes in private companies before they go public allow a broader audience of investors to potentially reap outsize gains once reserved for venture capital and private equity.

But shares in a company can be spread across dozens of funds within one mutual fund family, diluting the impact of an IPO's upside and downside, said John Bonnanzio, who edits a newsletter for Fidelity investors.

Nevertheless, mutual fund investors can get a pop in their portfolios if the fund managers buy stakes in private companies months and even years ahead of a market listing. The funds typically get to buy shares at prices below the public offering price. And if the IPO stocks rise after their debut, all the better for mutual fund investors.

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

Disinterest allowed Fidelity and other mutual funds to gobble up big allocations of Google's stock, watching it rise from $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-profile IPOs expected during the next several months. Chinese e-commerce giant Alibaba Group Holding Ltd and hotel operator Hilton Worldwide are among the listings expected to whet the appetites of Wall Street and retail investors. Shares of Empire State Realty Trust Inc, owner of the Empire State Building, were up 1.5 per cent Wednesday afternoon in their market debut.

While some U.S. mutual funds already have made direct investments in Twitter, they are going through the backdoor to capitalize on others before IPOs.

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

Three funds of American Funds, led by the EuroPacific Growth Fund, owned a combined 9 per cent of Softbank's stock at the end of June, according to Thomson Reuters data. Mutual funds also will get a chance to participate directly in the Alibaba IPO, which could launch in New York or Hong Kong.

Last year, several dozen T. Rowe Price funds held a combined 5 per cent stake in Facebook Inc Class A shares before the social media company went public last year. Facebook's stock tumbled after its debut. But the stock is now trading above $50 a share, or 32.5 per cent above the IPO price, outperforming the S&P 500 Index by 5.5 percentage points during that span.

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

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

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