Will Danoff, one of the U.S. mutual fund industry's best stock pickers over the past 25 years, is tapping the brakes on funding so-called unicorn companies, saying the prospects for fast growing private businesses before they go public may be fading.
Unicorns — start-ups valued at $1 billion or more — are making front-page news around the globe, and that makes Danoff nervous. He runs the $111 billion Contrafund for Boston-based Fidelity Investments and his pre-IPO investments can lend an imprimatur of legitimacy, given his track record of picking blue-chip winners.
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"There are so many unicorns. It means you have to be more careful than we were three or four years ago," Danoff said in a telephone interview with Reuters. "Maybe we are at a point where it's going to lose a bit of luster."
Danoff, 55, is not a household name and lacks the swagger of hedge fund managers such as Pershing Square's William Ackman or Third Point Capital's Daniel Loeb. But through Contrafund, a staple in U.S. 401(k) retirement plans, Danoff manages more money than those two combined. And over the past 15 years, Danoff has beaten the S&P 500 Index by 62 percent, with an annualized total return of 8.12 percent versus the benchmark's 5 percent, according to Morningstar Inc data.
Danoff's Contrafund has about $1.4 billion invested in pre-IPO companies that include social media site Pinterest ($457 million), office space business WeWork Companies ($212 million), and car service Uber Technologies ($193 million), for example. It's the single largest portfolio of pre-IPO companies in the U.S. mutual fund industry, according to industry fund disclosures.
"You need to find franchise companies, almost up there with Google, Twitter and Facebook," Danoff said. "These phenomena are cyclical. You have confidence early in the cycle, but you do investments with extreme caution later in the cycle. I'm much more careful with my recent moves in the private space."
Over the past three years, the valuations of private companies such as Uber, Xiaomi, Snapchat, Pinterest, Airbnb and Dropbox, for example, have skyrocketed, as they prepare to become publicly traded companies. Mutual funds such as Contrafund have become a bigger player in an investing sector once dominated by venture capital firms, boosting competition.
"It's similar to a hot IPO," Danoff said, describing the competition for getting a piece of the action in the private rounds of funding for start-up companies.
However, Danoff said he may only get one shot in investing in a unicorn before it goes public.
"It's little more difficult to pass up (than an IPO) because you're never sure if you get that second look," Danoff said. At least with an IPO, you can buy the stock later if the price drops. Danoff did that with Facebook Inc and now owns a stake worth about $5 billion.
But in recent weeks, unicorn valuations have cooled off. Several funds run by Fidelity, including Contrafund, have cut the valuations of some big private companies, including Snapchat, Zenefits and Delphix Corp. Individual portfolio managers don't set valuations, which at Fidelity are done by a separate investment committee. Contrafund doesn't own Snapchat, which the committee devalued by 25 percent in October, but it does own Delphix, which the committee cut by 43 percent.
Danoff said he feels good about the two dozen or so pre-IPO companies in his portfolio. But even two years ago, when Contrafund made a $159.4 million investment in Pinterest's Series E funding round, Danoff admits to balking at the price.
"I was like, 'My gosh, that's a high valuation,"' Danoff said. But since then, the value of that Series E stake in Pinterest has climbed nearly 150 percent, according to Contrafund disclosures.