With investments by private equity firms reshaping corporate finance, and driven by the promise of higher returns, mutual funds are beginning to invest in private equity--in spite of the fact they have traditionally stayed away from such illiquid and volatile investments, The Wall Street Journal reports.
Last year, the Cambridge Associates' U.S. Private Equity Index rose 27%, compared to the 5% increase in the S&P 500.
The Firsthand Technology Innovators Fund invests directly in private companies, to mixed results. The fund's three-year annualized return through the end of July is negative 5.2%. While one of its holdings, nanotechnology company Silicon Genesis, jumped 50% to $2.6 million, as of March, its $3.2 million investment in communications equipment manufacturer Luminous Networks has been all but wiped out.
One form of private equity that has become popular among mutual funds is PIPEs, or private investment in public equity. These are shares of publicly traded companies that are only offered privately, and are often available at discount. Because they are privately traded, purchases don't drive up share prices, so funds can readily take out a large position. Mutual funds invested more than $3 billion in PIPEs last year, representing 21% of the market.
But they are also risky, since most companies that issue PIPEs are small and unprofitable, and it is not possible to sell the securities on the public market until the companies register with the SEC, which can take 90 days or longer, during which time the stock may plummet.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.