The Surprising Advantage of Private Investments: You Can’t Panic-Sell

Amy Arnott: Hi, I’m Amy Arnott with Morningstar. I first interviewed Will Danoff about Fidelity Contrafund FCNTX back in the early 1990s when I covered the fund as a mutual fund analyst. It was great to have the opportunity to talk to him again at the Morningstar Investment Conference in June, leading up to his retirement at the end of this year. I hope you enjoy this excerpt from our conversation. He’ll talk about why Fidelity invests in private companies as well as public companies and how the firm uses its industry expertise to understand innovative companies before they go public.

How to Analyze Private Companies

Christine Benz: You mentioned rocket ships a couple of times, and we noticed that SpaceX SPCX was among your top 10 holdings as of the end of April. Can you reflect on buying companies before they go public, buying stakes in companies before they go public? How do you decide when to do that versus waiting until a company’s public?

Will Danoff: Yeah, Christine, I can’t comment on specifics...

Benz: No, I get that.

Danoff: ...but at some point my colleagues and I said, “Hey, we’re pretty good at analyzing public companies. We have all this industry expertise. Might there be some private companies that we could help?” And I’d say it’s cyclical. As you know, many of the private companies have stayed private longer, partly because they have access to capital as private companies, but many of them are doing extremely innovative things. Fidelity is always interested in finding new innovative companies. The entrepreneurs are remarkable, and the scale of a firm like Fidelity enables us to do that. Often, the public companies are a little less mature, and we have to be careful about that. Entrepreneurs are very talented, but they can be needy. But I’ve been very impressed, and often, it’s just once in a while, there is someone really exceptional.

Contrafund is an investor in Zipline, which is run by a fellow named Keller Cliffton, who’s just remarkable. He’s one of the leaders in drones. Again, it’s just one of these crazy stories. It’s like, what happened? They tried to make a drone, and they were out in Nevada, I think, and they were struggling a bit. Then, I’m not sure exactly how, but he convinced the health minister of Rwanda that he could deliver blood to rural hospitals. There was a very high incidence rate of young mothers dying after they delivered their babies because there were no roads out to these hospitals. That’s remarkable. Again, they figured out the technology in Rwanda of all places, and now they’re working with Walmart and others in the United States, but it was just sort of like, this is unbelievable. He’s a great entrepreneur. So, I decided to do it. I mean, sometimes you make a mistake, and you make a judgment call. As you all know, there are people who can do a good job of convincing you.

So, that was just one, but there are others. And the key then is to monitor what’s going on. In the case of SpaceX, when we first got involved, I think it was in 2012, the one advantage we have, Amy, with the privates is you can’t sell. I believe in long-term investing, but there are so many opportunities to panic out. With the privates, you can’t really panic out because there’s not that much of a market.