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Tucked away inside many of Fidelity Investments’ mutual funds are shares of companies that the average person simply can’t buy.

Why?

Unlike most of Fidelity’s holdings, they’re not yet traded on any exchange or market. Instead, these companies are promising, privately held businesses like Rivian, a maker of electric trucks, rocket builder SpaceX, or Epic Games, which runs the popular online battle game Fortnite.

The goal is to help Fidelity’s mutual fund shareholders capture the upside as these companies grow in value on the path to an initial public offering. Sometimes, it works great — as when Fidelity bought shares of Airbnb or Facebook. Other times, as with the e-cigarette maker Juul Labs or Intarcia Therapeutics, a Boston company designing a new medical device for diabetics, the companies stumble, and Fidelity has to write down the value of the shares it purchased.

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The Boston-based executive in charge of scouting these deals for Fidelity is Karin Fronczke, who joined the financial services firm in May of 2020 from J.P. Morgan. While other Fidelity divisions, like F-Prime Capital and Devonshire Investors, look to invest in startups as they’re initially building their products and finding customers, Fronczke, as the global head of private equity, tends to invest once their businesses are more solid.

I spoke with Fronczke in late September about Fidelity’s investments in these more seasoned startups — writing checks that can surpass $100 million at a pop. (As one recent example, Fidelity put $410 million into the message board operator Reddit in August.) This Q&A has been edited for length and clarity.

Q. When did Fidelity begin to buy shares in private companies for its mutual funds?

A. It was about a decade ago when we started investing in private companies. If you dial back about a decade ago, there were some unicorns [startups valued at $1 billion or more]. But they were a rare being, in the true definition of what a unicorn is. Fidelity realized it’s strategically important to get to know these companies, if they’re really going to grow and form a lot of their business while they’re still private. If you look back even just five years, in the US, there were nine unicorns that raised financing in the private market. So far there have been 375 in 2021. That’s like 30x growth for meaningful-size companies that are raising equity from shareholders privately.

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Q. What’s the upside for an owner of a Fidelity mutual fund that owns shares in these private companies?

A. The limit [for any given fund] is 10 percent. So it’s always going to be a small part. But the value to the owner of a mutual fund is, number one, a lot of the value creation for these companies is now happening privately, before they even go public. And number two, inherently, these companies are a lot of the next-gen disruptors in any given industry. Because they’re creating value privately, investing earlier while they’re private [gives Fidelity fund managers and their shareholders] exposure to who those disruptors are, and it builds the conviction for when they do become a public company. We’re not meeting them for the first time at their IPO roadshow.

We had several dozen of our private shareholdings go public last year. In the majority of those instances, we were a top buyer at the time of the IPO. That’s the goal — to create a partnership with these companies and management teams early.

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Q. How are these shares in private companies valued, given that you don’t have a public market telling you minute by minute what the price is?

A. One of the core competencies and benefits that we have at Fidelity is our extensive research capabilities. We have a few hundred research analysts globally that we can leverage when we evaluate a private company.

We have a responsibility, because these private securities sit within our mutual funds, to evaluate them on a daily basis. We get updated metrics [from the companies] with a pretty regular cadence, but we’re also evaluating what’s happening in the public markets with peer companies. Or if [a private company is] raising a new financing, we look at what the valuation [set by investors] is at that point.

Q. Are there some particular themes or sectors you are especially focused on?

A. As a firm, we are super interested in the electrification of the vehicle — and what that means not only for people producing electric vehicles, but charging stations and batteries to get our globe shifting from internal combustion vehicles to electric vehicles.

Space is another interesting theme. SpaceX has for many years been [in our funds] as a pretty large private company. We have done some investing in [agricultural technology and cleantech]. And the theme I didn’t mention is data — data is taking over the world, whether it be cloud or data architecture or machine learning and artificial intelligence.

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Q. You arrived at Fidelity last year, in May of 2020. What was that transition like?

A. There was just a lot of uncertainty in the world around what was going to happen with COVID. Everybody was locked down. I began the job in a complete Zoom world. We really just tried to stay focused through that turbulence and volatility on what was best for our shareholders. If you’d have said, “What’s going to happen in the private market,” I would’ve said, “It’s going to completely dry up and go quiet. Who’s going to want to invest in a private company when the public markets are falling?” [But as public markets recovered], the private market really took off for companies who were performing well.

Q. What has it been like having a virtual team and trying to evaluate all these potentially interesting deals virtually?

A. I’m based in Boston, and my team is primarily based here. But this has become more of a global effort. We have two folks in London — one looks after our private investments in Europe, the other in Asia. I think we have learned that Zoom and other things help build that connectivity, but we all look forward to the day when we’re back together and can be exchanging ideas at the water cooler or when we grab coffee together.

We have been able to invest, and invest successfully, in private companies [in this period]. We’ve done factory tours via Zoom. We invested in a company that sent us some of its products to taste, a vertical farming company [Bowery Farming, based in New York]. We’ve tried to be, in this COVID world, creative around how we learn about companies, and how we diligence companies. And as [COVID] numbers have been down during the summer, I’ve been doing more travel to see some of these companies. Being there in person with the founder and management team, and sitting in an electric vehicle, or doing a farm tour — it’s hard to replace that in-person interaction.

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Q. How would you describe today’s dynamic, where it seems that many private companies are just awash in capital, and valuations are going up and up?

A. It’s a virtuous cycle that has been pretty positive. You have more companies that are growing and maturing more privately, and more shareholders of various types with very large pools of capital to invest in private companies. So going public is still important, but there’s certainly no rush for [a company] to do it. They can reach a lot of the milestones that are important for their business in the private eye, before they choose to go public. They can focus on execution. [And with healthy IPO markets], shareholders are getting more returns, which means they have more money to deploy [into a new generation of private companies].

Q. How many Fidelity mutual funds would you say have private company holdings in them, in addition to public stocks?

A. I’d say a good portion. Almost every fund manager is taking the time to get to know these [private] companies and meet them. It’s about building the conviction and understanding of what these companies are doing because they are the next disruptors. My team is responsible for not just sourcing [the opportunities], but [evaluating] them. Then, the ultimate investment decision is made by the fund managers.


Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.