An academic paper investigates the dramatic increase over the past twenty years in the number of mutual funds participating in the private markets and the effects and nature of this trend. The authors noted that as of 2015, 25% of the public equity in the United States was owned through mutual funds and that mutual funds’ allocation decisions can have real effects on the firms in which they invest. The research included the largest fund families e.g., Fidelity and Blackrock as well as smaller fund families. The authors cited evidence showing that an increasing number of private firms have raised capital from mutual funds prior to going public -- specifically that between 1995 and 2010, less than 5 percent of venture capital-backed firms had mutual fund investments before their IPO but the percentage increased to 15 percent in 2013, 19 percent in 2014, and 24 percent in 2015. The authors noted that mutual funds relied on the expertise of intermediaries, such as underwriters and venture capitalists, to evaluate the quality of the private firm targets. Financing from mutual funds is an attractive source of capital that enabled firms to remain private for a longer period, the authors wrote. Delaying a public offering can benefit private firms in a number of ways, including relieving them of regulatory reporting requirements. The paper also studied the types of firms that funds choose to invest in and found that funds:
- tended to concentrate on firms that have demonstrated some level of success;
- were more likely to invest in firms backed by more reputable venture capitalists;
- tended to invest in firms that are more similar to the public firms in which they generally invest and are located either in close proximity to themselves or in a location with a high concentration of private companies; and
- were significantly more likely to invest in companies that have applied for more patents and companies that have raised more money in earlier rounds of financing.