Fidelity analysts court companies on ground floor

Christopher Bartel (left), Deena Friedman, Tobias Welo, and Edward Yoon are among the Fidelity analysts who research investment in private companies.
Pat Greenhouse/Globe Staff
Christopher Bartel (left), Deena Friedman, Tobias Welo, and Edward Yoon are among the Fidelity analysts who research investment in private companies.

Facebook Inc. became a stock market sensation before it went public last year, in part because some high-profile investors already owned pieces of the social media giant.

Fidelity Investments and a number of other mutual fund companies were among them. These fund firms normally buy and sell publicly traded stocks and bonds for their investors, but some had been purchasing small stakes in Facebook while the company was still privately owned.

For some mutual funds, this was a rare bet on a hot start-up. But not for Fidelity. The Boston investment firm employs analysts who routinely get to know young companies before they go public, recommending the best prospects to money managers like Will Danoff, who runs the giant Contrafund. By getting involved early, funds often can reap big gains when companies launch initial public stock offerings or agree to be sold.


In the past five years, Fidelity has made 59 equity investments in private companies totaling $1.7 billion. In addition to Facebook, it has bought names like Zynga Inc., the online game company, and upscale retailer Michael Kors Holdings Ltd.

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If it sounds a little like venture capital, it is. Only Fidelity mutual funds are not making bets at the earliest stage of start-ups. Fidelity is, however, schmoozing venture firms to find promising private companies that may need to raise more cash before listing shares on a stock exchange, where everyone can buy them.

“It's very selective,’’ said Edward Yoon, manager of Fidelity’s Select Health Care Fund and leader of a team of analysts. Of 20 biotech and other private deals he reviews in a year, he might invest in one. And when he takes that risk, he’s looking for a much bigger return than he’d expect from a publicly traded stock.

“I think of it as a venture capital investment where, if it works out, we’re going to make 10 times our money; we’re going to make 15 times our money,” Yoon said.

The $1.7 billion in private deals is a drop in the bucket for Fidelity, which oversees $1.1 trillion in mutual funds for 401(k) savers and other investors. No single investment is meant to swing the results of a fund, the firm says, and it’s unlikely to, given the stakes are quite small. Managers must get approval from two senior executives before making the investments.


There are two reasons for doing these risky deals. First, when one of Fidelity’s private companies takes off, customers get a nice bump in their return. Second, on a strategic level, the investment firm gets to know and court important up-and-coming companies, said Christopher Bartel, Fidelity’s chief of global equity research, with a goal of gaining an edge across all its mutual fund investments.

“With Facebook, that relationship had been developed over years,’’ Bartel said. “It didn’t matter whether Facebook was private or public. You had to understand their business model.”

Understanding Facebook, he explained in a recent interview, has helped Fidelity grasp how other important companies — from Apple Inc. to Google Inc. — were performing. Fidelity aims for that same deep-dive research in every industry sector, like biotechnology, in which Yoon leads a team that includes an analyst with a PhD in neuroscience.

Said Bartel, “If Eddie and the biotech team doesn’t understand what’s being developed on the private side in biotech, you may miss something that could really change the outlook for a major pharmaceutical company.”

Fidelity’s Danoff has invested in private shares for many years, reaping big gains on Google and buying up $86 million worth of Facebook ahead of the IPO. It’s difficult to determine exactly how much Fidelity actually earns from private stock transactions, because the firm doesn’t disclose when it sells those shares.


Fidelity bought into Facebook for about $25 a share. So it looked like a big gain was in store when the hot IPO shares were priced at $38 each. But Facebook’s stock price fizzled after going public, and Fidelity, like other pre-IPO owners, couldn’t sell those shares for another six months. The stock had fallen to about $25 within a month and closed Wednesday at $27.45

Other stocks have paid off in spades. For instance, Michael Kors, a New York-based seller of luxury women’s apparel, went public at $20 per share, 64 percent higher than Fidelity’s $12.12 pre-IPO holding price. Several Fidelity funds benefited from the gains, which have continued: Shares now trade over $60 and have climbed 145 percent since the initial offering in December 2011.

Bartel said he’s a fan of private deals in part because they get analysts and portfolio managers to think about longer-range outlooks. “We obviously want to get away from the short-term,’’ he said. “We’ll let some hedge fund do that. These are big, long-term trends where you can really make an investment case that’ll play out for multiple years.”

Venture capitalists generally like to get out of their investments as soon as possible. But Fidelity would rather continue to hold these stocks if the companies do well. That’s why portfolio managers often prefer an IPO to an acquisition of a private company they own.

Pat Greenhouse/Globe Staff
Christopher Bartel (left) and Tobias Welo help track promising companies for Fidelity.

“Sometimes I’m upset when a company buys one of my public holdings,” said Tobias Welo, a portfolio manager and leader of Fidelity’s industrials and materials sectors. “You’ve identified something that you knew was going to be a great 10-year investment.” But then it’s gone. Instead of reaping gains as the company grows, Welo said, he has to find another investment to generate those returns.

Even when companies go private, the research staff continues to follow them, said ­Welo, who is in regular contact with about a dozen major private equity firms that invest in his sector. Knowledge of the companies helps another division of Fidelity — the high yield debt investors — make informed decisions about buying bonds issued by those companies.

Fidelity isn’t the only mutual fund company mining private companies, but it may be the biggest. It is, by all accounts, among a handful of players that do such investments, including T.Rowe Price, a Baltimore-based mutual fund firm, and Wellington Management in Boston, which handles some Vanguard mutual funds.

John Bonnanzio, editor of a Wellesley-based investor newsletter called Fidelity Insight, said it makes sense that Fidelity is devoting resources to private companies. “It’s part of total return, looking for’’ outperformance, he said. And it can be a tool in a super-competitive arena where it’s hard to beat the market: “How do you get a slight edge on everyone else?”

Beth Healy can be reached at