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Deal Shows Investors Are Willing to Make a Blind Bet on Uber

A deal about to close on Wall Street illustrates just how much some investors are willing to give up to gain a piece of the hottest start-up.

Wealthy clients of Morgan Stanley are piling into a special fund that gives them a chance to bet on Uber, people briefed on the transaction said. The fund, called New Riders L.P., is a lesser-known contribution to the billions of dollars in capital that Uber, the private ride-sharing company, has been raising in recent months.

Yet unlike the other investors in the current fund-raising, including the hedge fund Tiger Global Management and the mutual fund T. Rowe Price, the investors in the Morgan Stanley fund are effectively handing over their money with their eyes closed.

The institutional investors are getting financial disclosures on revenue and expense metrics and projections, a person briefed on those terms said. But the 290-page offering document for the New Riders fund, which was reviewed by The New York Times, does not provide any financial details about Uber.

The investors are also not getting direct equity in Uber, but only indirectly through the fund. As a result, the fund has few protections for investors.

Even so, all this has not stopped wealthy investors from committing about $ 500 million to Uber’s latest round, the people briefed on the transaction said, valuing the San Francisco-based company at $ 62.5 billion.

The fund’s investors are seeking to profit from whenever Uber decides to go public, presumably at a much higher valuation.

Such speculation highlights the euphoria that still surrounds a select group of Silicon Valley start-ups even as valuations for others decline and the public stock market stumbles. For some investors, the deal is as much about having an early, exclusive slice of a trailblazing company, one that has become the world’s most valuable start-up.

“Only Uber can do this,” said Joshua M. Brown, a financial adviser at Ritholtz Wealth Management. “They are the last of the gigantic unicorns that people are clamoring to get into.”

Morgan Stanley is offering $ 475 million of new preferred stock in Uber to its clients, the people said, through a special fund that holds only those shares. These clients must have a net worth of at least $ 10 million and a minimum investment of $ 250,000. They are not allowed to invest more than 5 percent of their net worth.

Bank of America Merrill Lynch is also pitching Uber to its clients through a similar fund. The brokerage firm, however, requires an investment of at least $ 1 million and a net worth of $ 100 million, and its clients must have had $ 5 million in Merrill Lynch accounts for six months, people briefed on the Bank of America terms said. This may explain why Bank of America is expected to sell just $ 25 million worth of the deal, they said.

Representatives from Morgan Stanley, Bank of America and Uber declined to comment for this article.

Previously, institutional investors and others have plowed about $ 1.5 billion into the round, for a total deal of $ 2 billion or more, people briefed on the transaction said in December. The size of the round, and the allocation to individual investors, could still change based on demand, a person briefed on the transaction said.

People with deep pockets are often tempted to make risky bets, investing in hedge funds, private equity vehicles and, of course, in young private companies like Facebook, before it went public. And making such investments can often mean doing so without disclosures and certain protections.

But in some ways the Uber deal is asking even more of investors. The company has already raised $ 10 billion as a private company and has yet to give any indication of when it might go public. And despite raising large sums of cash, Uber has spent much of that expanding around the world — and is still losing money.

The wealthy investors buying into the deal most likely know of at least some of the risks and can afford to lose money.

Still, the lack of financial data on Uber in the deal documents could become a disadvantage for them. Without details on revenue, costs and other data, it is hard for the investors to assess over time whether the company is performing well and whether the more than $ 60 billion valuation was expensive or cheap.

In the offering document, Morgan Stanley says that Uber represents an “attractive investment opportunity” but warns that it “has conducted limited due diligence with respect to the company.” The document says Morgan Stanley has not “independently verified the accuracy or completeness of such information.”

“Lack of visibility, that’s par for the course with these types of things,” said Anand Sanwal, the chief executive of CB Insights, a venture capital analytics firm. “There’s been unlimited appetite for Uber equity; they’ve been able to raise at will.”

The lack of transparency around private companies has caught the attention of Washington. In an interview with Bloomberg last week, Mary Jo White, chairwoman of the Securities and Exchange Commission, said she was worried about individuals not “getting sufficient or accurate information” on start-up companies before they decide to invest.

For Morgan Stanley, the deal may raise competing loyalties. On the one hand, the firm gets up to 2 percent of the capital that wealthy investors commit, as well as a small performance fee if their investment triples.

Yet the deal may be more important to Morgan Stanley for cementing its relationship with Uber. It could put the Wall Street firm in a prime position for investment-banking business, like leading an initial public offering or advising on acquisitions.

Morgan Stanley has sought to address this tension by including 10 pages of potential conflicts of interest in the deal document.

An argument can be made that in funds like New Riders, banks are helping democratize to a degree the process for investing in private companies. Start-ups are staying private longer than ever before, enabling institutional investors like venture-capital funds and hedge funds to benefit from the biggest growth spurts.

This was the motivation behind a similar arrangement for Facebook in 2011. About 16 months before it went public, Goldman Sachs solicited $ 2 million-minimum investments from its wealthiest clients for Facebook shares. They were prohibited from selling before 2013.

At that time, rules prohibited having more than 500 investors “of record” without publishing financial disclosures. To avoid them, Goldman Sachs set up a fund, designating itself the investor “of record,” while allowing its own wealthy clients to acquire interest in the fund.

The structure was similar to Morgan Stanley’s current arrangement with Uber: placement fees paid to the bank, little liquidity, and few financials, said a person briefed on the terms from 2011. In the end, Goldman Sachs had to restrict the investment to those outside the United States, on concern that the firm may have violated regulatory prohibitions for “general solicitation and advertising” private offerings.

The Facebook case turned out fine. The company made its market debut with a valuation of more than $ 100 billion — more than twice where Goldman Sachs clients invested, and even though it slipped to about $ 60 billion one year after going public, most still came out ahead. Today, Facebook is valued at $ 315 billion.

Many of the restrictions that hampered the Goldman Sachs-Facebook deal were lifted through the Jumpstart Our Business Start-Ups Act of 2012.

As long as investors are accredited — which wealthy ones are — they are now able to get marketing about private placements. The new rules also lifted the investors “of record” threshold to 2,000 before a company needed to register its securities.

The investors in the Uber fund are no doubt hoping to repeat the success that those investors had in Facebook. But there are risks.

“They are a brand-name, venture start-up,” Mr. Brown said. “They are basically saying, ‘We’re Uber and no one’s putting a gun to your head, and we’re doing you a favor.’ ”


NYT > Technology

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