JP Morgan’s new media fund forces out the little guy, again

JPMorgan Chase’s fund is being shopped around to wealthy investors while the rest of the world gets to wait for what will likely be a bloated IPO share price at some undetermined date in the future.

JPMorgan Chase & Co. (NYSE:JPM) appears to be readying a New Media investing fund that would give high net worth individuals access to shares in late-stage tech companies like Facebook and Groupon. The fund, which was first reported by the Wall Street Journal, would focus on social networking and other new media companies that are nearing IPOs.

The move echoes Goldman Sachs Group’s (Public, NYSE:GS) $1.5 billion round of financing for Facebook. Goldman kept $500 million worth of shares in the social networking company for itself, then offered the rest to wealthy investors outside the U.S. Likewise, JPMorgan Chase’s fund will likely get shopped around to wealthy investors while the rest of the world waits for a bloated IPO share price at some undetermined date in the future.

It’s yet another advantage that the wealthy have over small-time retail investors. Since companies like Facebook aren’t yet publicly traded, shares are only available via financing deals directly with the companies or on secondary markets including SharesPost and SecondMarket (read my post on How to buy stock in private companies for more).

These secondary exchanges provide a place where early-stage investors or employees at companies like Facebook can sell their shares to Accredited Investors or Qualified Purchasers. To be deemed an Accredited Investor, you’ve got to have a net worth of $1 million or more. If JP Morgan’s plan comes to fruition, it would give even more wealthy investors access shares in red-hot private companies – not just Facebook but likely others as well including Twitter, LinkedIn and Pandora.

“The sense that smaller investors will get the higher price when (these) companies come public and that the smaller investor is not having the same opportunities, feels just wrong,” writes a commenter on an article at DealBook.

My sentiments exactly. The whole scenario has part of me wishing I could invest in the New Media fund while the other half hopes that the valuations in these private companies get pushed so high that the shares crumple at IPO.

If nothing else, the frenzied valuation spike in private social media companies should give you pause before you place a buy order when the shares go public – if they ever do.



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