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Fund Spy

Is Private Company Ownership a Risk for Mutual Funds?

A recent Morningstar study shows most funds tread lightly in private-firm investments.

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With high-profile private firms such as Uber and Airbnb appearing in some mutual fund portfolios in recent years, investors may be wondering what to make of such exposure. Mutual funds provide daily liquidity that allows investors to contribute or withdraw money each day, so the inclusion of less-liquid private firms has come under scrutiny.

There are other reasons this has become a more visible issue. First, private companies have delayed IPOs, opting to raise capital in the private market and build their businesses without the pressure that comes with being publicly traded. Second, private firms have increasingly become part of fund managers' due-diligence efforts, as some of these firms have changed the competitive dynamics in their industries and grown larger than even their publicly traded peers. Third, active managers, who have faced a picked-over public stock market and widespread underperformance against passive funds, have found appeal in the performance edge that private-firm equity investments can potentially offer.

Katie Rushkewicz Reichart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.