Fidelity, in Reversal, Raises Value of Many Tech Startups
Mutual-fund company’s change of course in March comes after it had cut the value of these investments in the first two months of the year
Fidelity Investments reversed course in March, marking up many of the stakes in closely held technology companies it had previously cut, including a biotech startup that was subsequently acquired at a large premium.
The mutual-fund company late Friday released valuation estimates as of March 31 for its holdings in various funds. Fidelity wrote up the value of software firm Domo Inc. by 68% after marking it down 29% in February. Stemcentrx Inc., the cancer-drug maker that AbbVie Inc. said this past week that it would acquire for up to $9.8 billion, was marked up 61%, back to the value Fidelity paid for the shares in August.
A rebounding stock market likely led to many of the March markups. The tech-oriented Nasdaq Composite Index rose 7% in March, wiping out much of the losses suffered in the first two months of the year. The Domo markup, however, was back to the share price at which the company raised new capital in March, the same price as the prior year. In April, the Nasdaq Composite fell 1.9%.
Other shares marked up by Fidelity in March include software companies Cloudera Inc. and Nutanix Inc., each up about 20%, as well as storage firm Dropbox Inc., up 14%. Fidelity marked up ad-technology company AppNexus Inc. and software firm MongoDB Inc. over 20%. All five of those companies’ values are still down overall since December, due to prior markdowns in January and February.
T. Rowe Price Group Inc. marked down most of its investments in closely held technology companies for the month of March, including Uber Technologies Inc. and Dropbox.
At least 13 startups have one or more mutual funds marking their stakes at below the price the funds paid, according to The Wall Street Journal’s Startup Stock Tracker. Still, many have delivered big gains to the funds, including Uber Technologies and Airbnb Inc.
The markdowns have caused much consternation in Silicon Valley. Many venture capitalists and company founders were caught off guard, assuming that after mutual-fund firms invested in their companies the firms would hold the investments at cost.
Speaking to tech news site the Information on Friday, the chief executive of Stemcentrx, Brian Slingerland, criticized Fidelity for marking down the shares of his company, saying they complicated deal talks. A day after the deal was announced, Fidelity said it had marked Stemcentrx shares back up as of the end of March.
“I think the unicorn and markdown situations need to be judged on a company by company basis,” said Mr. Slingerland in an email, referring to startups valued at more than $1 billion. “In our case, while the marks created some confusion, the benefits of having Fidelity as a private investor far outweighed.”
It isn’t clear exactly when Fidelity’s valuation committee sets prices for the prior month. A spokesman for Fidelity didn’t immediately respond to a request for comment.
Valuations for closely held companies are determined by a special committee that sits apart from the portfolio managers who buy and sell stocks. To value illiquid shares, such committees typically look to a company’s financial information, the value of publicly traded rivals, and share prices paid by investors in previous funding rounds.
Mutual-fund firms are required by regulators to estimate the value of illiquid securities, in part because their own investors are trading in and out of the funds frequently.
Those investors receive the current net asset value for the mutual-fund shares when they buy or sell. If, for instance, the fund firm holds the valuation of an illiquid startup steady despite a rapid decline in the overall market, the net asset value of the fund might be artificially high. That would benefit those trading out of the fund at the expense of those buying in.