Understanding investor overlap across late-stage private stocks

Private market investors frequently have a clear concentration on particular industries or sectors when seen as a whole. Investment firms that have a superior grasp of the businesses and industries in those niches, whether it be software-as-a-service (SaaS), retail, supply chain, or any other industry, can leverage their knowledge to find interesting prospects.

Investments in the same or related firms may result from this as well. For instance, a group of businesses with a common interest in technology may be interested in late-stage private technology enterprises. This may result in fierce rivalry among investors for a small number of available investment possibilities and may also raise the value of these businesses. However, previously sector-specific investors are increasingly moving beyond their areas of expertise and investing in potentially profitable companies in all sectors. And this tendency has spread to more conventional asset managers, and a variety of different sizes and types of businesses can now be found among private market investors.

The tendency of traditional asset managers, such as mutual funds and pension funds, to increase their participation in private venture-backed enterprises is one aspect that we shall assess in this article. This represents a substantial departure from their prior emphasis on publicly-traded firms and demonstrates that these asset managers are searching for fresh approaches to producing alpha and diversifying their portfolios.

With many names being widely held across an array of private and public funds, the public lens of Securities and Exchange Commission (SEC) reporting allows us to look into who is remarking, and actively buying or selling in 2022. ApeVue’s use of the Neo4j knowledge graph technology has recently helped more easily shed light on fund value changes.

In the past, one would be surprised to see an asset manager such as Fidelity, or T. Rowe Price, or a pension fund, such as Ontario Teachers Pension Plan, investing in private assets. These firms have increased their exposure to private markets in recent years, although often only by making investments through general partners like venture capital (VC) or private equity firms. But today, alongside well-known venture capital firms like Kleiner Perkins or Lightspeed Venture Partners, we see them as direct investors in private enterprises. This is clearly the case when looking at the owners of Epic Games, the North Carolina-based publisher of video games and software, as we can see in the graph below.

When you drill into the overlap between VCs and traditional asset managers, you see that the lines have become more blurred than ever before. Below, we show Fidelity Investments’ private holdings alongside FinSight Ventures. While they each have holdings in multiple private companies, you see direct overlap on both ThoughtSpot and Convoy.

Although they invest in similar or the same companies, reporting requirements for traditional asset managers like mutual funds differ drastically from a VC fund. The main difference between these fund types in terms of reporting requirements is the frequency and level of detail of the information provided to investors. Mutual funds are required to provide more frequent and detailed reports, while venture capital funds are subject to less stringent reporting requirements.

As mutual funds and other asset managers invest more and more directly into illiquid private companies, access to independent pricing information will be crucial to maintaining transparency for investors and to accurately mark positions.

When examining how mutual fund valuations of these private holdings vary from one to another, there is a wide margin between these marks, which highlights the need for more standardized valuation metrics and pricing information.

Although this graph is not pretty, it shows the incestuous relationship between late-stage investors of all kinds. This includes corporate venture arms (Salesforce, Microsoft), VC funds (Andreessen Horowitz, Accel Partners), asset managers (Fidelity, T. Rowe Price), and hedge funds that invest in private companies (Viking Global, Tiger Global).

So, whose mark is “correct”? Venture capital firms and private equity funds do not have a regulatory requirement to update portfolio valuations like mutual funds, and typically just look at the last primary round, which is often stale and does not account for more recent private and public market movements. Mutual funds and others have to rely on limited information (when comparing to public assets), but provide more frequently updated marks. So while one could argue that the more recent valuations provided by traditional AMs are the “correct” ones, it will take many factors such as investor pressure and regulatory input for a more standardized valuation methodology approach of private assets across all types of investment firms.