Wealthy investors aren't clamoring for a piece of Facebook Inc. (FB)'s initial public offering because some own the stock through private transactions while others shy away from risky technology deals, according to advisers.
“It's kind of the late arrivals who get excited around the time of the IPO,” said Jason Thomas, chief investment officer of Aspiriant, whose clients on average have about $10 million under management with the Los Angeles-based firm. “Our clients remember the tech bubble very well, and are appropriately skeptical of being the last money in.”
Facebook, the world's biggest social-networking service, filed yesterday to raise as much as $5 billion in the largest Internet IPO. Morgan Stanley (MS), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co., Bank of America Corp. (BAC), Barclays Plc and Allen & Co. were hired to handle the deal for the Menlo Park, California- based company. The $5 billion figure is a placeholder used to calculate fees and may change.
Based on recent IPOs, investors who are able to buy in at the offering price once it's determined could be looking at below-average returns if they seek to buy and hold. They may face a large tax bite if they sell into an early run-up in the stock price.
Ed Reinhart, 41, holds about 5 percent to 10 percent of his personal portfolio in Facebook after buying shares in 2010 through SharesPost Inc., a secondary market for private-company stock. He said he likes the company's revenue-growth prospects and isn't looking to increase his position in the initial offering.
Buying the Hype
“You don't want to buy into the hype,” said Reinhart, who lives in Yakima, Washington, and is a managing partner for Capital Advisors Wealth Management, which works with institutional retirement plans. “I think it would be very wise for individual investors to stay back and let some of this steam escape, and see where all of this shakes out.”
SharesPost and SecondMarket Holdings Inc. facilitate transactions in private-company stock for accredited investors. That generally means individuals with assets of greater than $1 million, excluding a primary residence, or those earning more than $200,000 annually. SharesPost has offered transactions in Facebook shares since 2009.
Investors holding private-company stock at the time of an IPO generally are not permitted to sell their holdings for a certain period of time after the offering, generally as long as 180 days, according to Tim Sullivan, managing director of SharesPost.
Goldman Sachs in January 2011 halted a planned offering of Facebook shares to U.S. investors on concerns that media attention about the deal could violate rules limiting the marketing of private securities. Instead Goldman Sachs restricted the offering to non-U.S. investors, with Facebook raising $1.5 billion through Goldman Sachs clients and funds along with Digital Sky Technologies.
Some clients of Constellation Wealth Advisors LLC have invested in Facebook through venture-capital funds or the secondary market, said David Arizini, a managing director and partner at the firm in Menlo Park, California, whose investors generally have at least $10 million in investable assets.
Signature, which oversees about $2.1 billion for families, has been invested in private equity and hedge funds that have owned Facebook for a few years, said Andrew Gorczyk, a portfolio manager for the Norfolk, Virginia-based firm. He declined to name the specific firms or funds.
Most clients haven't expressed an interest in Facebook, said John Jennings, senior vice president of St. Louis Trust Co., a multifamily office based in St. Louis, which oversees about $3 billion for clients with an average of $75 million under management.
“It's more exciting than having another muni bond in your portfolio,” Jennings said. “But the way we invest, we're not going to load up on Facebook and try to make a quick buck.”
While some companies go public and do extremely well, the “odds are against you,” as some firms start trading at a high price point and then underperform or fail, said Scott Schermerhorn, chief investment officer at Granite Investment Advisors in Concord, New Hampshire, which manages about $500 million.
Shares of Groupon Inc. (GRPN) gained about 31 percent in their first day of trading after the firm's November IPO, and have since fallen about 22 percent as of Jan. 31, according to data compiled by Bloomberg.
Stocks of companies that held U.S. IPOs in 2011 lost about 1.1 percent on average from their offerings through Jan. 30, according to data compiled by Bloomberg. The Standard & Poor's 500 Index returned about 5.1 percent over the year through Jan. 30, including reinvestment of dividends.
Shares of Google Inc. (GOOG) jumped 18 percent on their first day of trading after the company went public in August 2004 and have risen more than 500 percent since, Bloomberg data show.
Many investors may already have exposure to Facebook even if they haven't deliberately acquired shares through the secondary market or a private fund. About 50 mutual funds have reported stakes in the company, according to Chicago-based Morningstar Inc. (MORN)
Funds managed by T. Rowe Price Group Inc. (TROW) held about $408 million in Facebook at the end of December, according to spokesman Robert Benjamin. Morgan Stanley Institutional Fund Opportunity Portfolio (MEGHX) held about 3.7 percent of assets in Facebook as of December, making it the fund's ninth largest holding, according to the Morgan Stanley website.
Asking for Shares
Fidelity Contrafund (FCNTX) held about $87 million in Facebook's Class B shares in December, according to the fund's monthly holdings report. That amounts to about a 12 basis-point allocation for the fund, which had assets of about $73 billion in December, according to spokeswoman Sophie Launay. A basis point is 0.01 percentage point.
People who have a broker may be able to ask for shares and the allocation may be determined by how much business they did at that investment banking or brokerage firm, said Todd Morgan, senior managing director at Los Angeles-based Bel Air Investment Advisors, which manages about $6 billion. Investors trying to obtain shares now may not gain access to a large enough allocation to have an impact on their portfolios, he said.
“It is difficult for most investors to access shares at the IPO price,” Kathleen Smith, principal of IPO investment adviser Renaissance Capital LLC, said in an e-mail. “Even the best institutional clients of Wall Street only get a small portion of their order filled at the offering price.”
Interested investors should study Facebook's financial information in the prospectus, including its growth rate, sales margins and cash on the balance sheet, and wait until the Facebook IPO has begun trading, Smith said. Facebook is considering a valuation of $75 billion to $100 billion, two people with knowledge of the matter said last week.
“People get caught up in the feeding frenzy that surrounds these opportunities,” said Gerri Walsh, vice president of investor education for the Financial Industry Regulatory Authority, the self regulator for the securities industry. “When a potential IPO is highly publicized and well-covered, people think that any way into that deal might be a legitimate way.”
The U.S. Securities and Exchange Commission in November filed an emergency enforcement action to stop what it said was a fraudulent scheme targeting investors trying to gain access to pre-IPO technology companies such as Facebook and Groupon. (GRPN)
Higher Tax Rates
Managers of the Praetorian Global Fund falsely claimed that their fund and related entities owned “shares worth tens of millions of dollars in privately held companies that were expected to soon hold an initial public offering,” according to an SEC statement. The individuals claimed that client funds were held in escrow while in fact they were being transferred to the managers' personal accounts, the SEC said in the statement.
While investors should be aware of the risks of trying to get a piece of the Facebook action this late in the game, their interest is understandable, said Aspiriant's Thomas.
“Our Silicon Valley clients have been outbid for houses by Google employees often enough,” Thomas said.
Those who do obtain shares at the offering price and sell into an initial jump could face higher tax rates on their profits. Gains on stocks held one year or less generally are taxed at an individual's ordinary rate, currently as high as 35 percent, while long-term gains usually are taxed at a maximum levy of 15 percent, according to the U.S. Internal Revenue Service.
“Who knows if it's going to be the next Google,” said Reinhart, the individual investor. “But even if you bought Google in the first year, you've still done well.”