In early 2011, it seemed like easy money.
As the valuations of Internet start-ups like Facebook and Twitter skyrocketed on the secondary markets, scores of investors rushed to capture a piece. The big Wall Street banks were no exception.
JPMorgan Chase opened the optimistically named Digital Growth Fund, a $1.2 billion account. Goldman Sachs made a direct investment in Facebook - to the tune of half a billion dollars. Morgan Stanley's mutual funds, meanwhile, bought millions of shares in online gaming company Zynga before its initial public offering.
Though promising at the time, nearly all those bets have soured.
Zynga has plunged 70 percent from its offering price. Groupon, once heralded as “the fastest-growing company ever†on the cover of Forbes magazine, is off more than 73 percent and slipping. And the golden child of the new Web, Facebook, is struggling to convince investors to hold on. Its stock has lost more than 40 percent of its val ue and many fear it could stumble further in the coming months as shareholder lock-ups expire, potentially flooding the market with more and more Facebook shares.
On Thursday, Facebook's first lock-up expired.
Investors who sold during the initial public offeringâ€" a group that includes Peter Thiel, one of Facebook's earliest backers, Accel Partners and Goldman Sachs (Mark Zuckerberg, the chief executive, is excluded)- are now free to sell about 271 million shares. Shares of Facebook slipped on Thursday, falling roughly 6 percent during the first hour of trading, to break the $20 mark. Between now and May 18, 2013, there will be four more waves, a chilling prospect for prospective investors.
Though the jury is still out on how these young businesses will ultimately fare and whether the investments of 2011 will turn to busts, Wall Street's biggest investors have plenty of skin in the game.
Morgan Stanley, for instance, the lead underwriter for many o f these stocks, purchased millions of shares in companies like Zynga, LinkedIn and Facebook at their initial public offerings, and in some cases, before. In February 2011, it bought more than 5 million shares in Zynga at about $14 a share. According to a filing submitted earlier this month, its mutual funds still own about 32 million shares, or roughly 6.9 percent of the gaming company's class A stock. The firm has also made big loan commitments, with more than $1 billion earmarked for Facebook and about $250 million pegged to Zynga, according to people with knowledge of the matter.
Shares of Zynga fell slightly on Thursday, opening at $3.03.
Goldman Sachs, which has also agreed to provide substantial loans to Facebook and Zynga, led a $1.5 billion investment in the social network in January 2011 at a $50 billion valuation. While most of that block went to its international clients, Goldman made a direct investment of nearly half a billion dollars. Entities affil iated with Goldman, which includes the direct investment and its private clients, managed to sell 28.7 million shares in Facebook's I.P.O. at $38 a pieceâ€" a profitable outcome.
The firm, however, is still holding on to 37.3 million shares. It's less certain if Goldman will make any money on this remaining block. It paid about $20 a share for its January investment, according to a person with knowledge of the deal, who requested anonymity because the terms of the deal are private.
Representatives for Goldman and Morgan Stanley declined to comment.
JPMorgan and its formidable balance sheet has also been active.
The bank, which secured a surprise No. 2 spot in Facebook's I.P.O., has about $1.6 billion in loan commitments to Facebook, according to one person close to the firm. Earlier this year, Facebook announced that it had expanded its credit facility to $5 billion and received a $3 billion bridge loan. The firm's exposure to Zynga is far smaller. It has agreed to provide about $195 million in loans, this person said. JPMorgan may end up losing more money from its Digital Growth Fund, which has large investments in Twitter and LivingSocial. Although LivingSocial, the daily deals site, had raised hundreds of millions of dollars at a valuation north of $3 billion, its fortunes have slipped in lock-step with Groupon's, a far larger rival. Amazon.com, which owns a 29 percent stake in the company, recently wrote down the value of its investment to $271 million.
JPMorgan has also loaned about $40 million to LivingSocial, the person familiar with the matter said.
