T. Rowe Price calls WeWork a 'terrible investment'

• In an unusually frank letter, fund managers at T. Rowe Price derided WeWork as a "terrible investment."
• T. Rowe Price led WeWork's Series D financing round in 2014, which valued the company at $4.65 billion.
• The fund managers said they invested with the understanding that WeWork would curb its losses and growth, but that didn't happen.
• WeWork failed to go public last year and nearly went bankrupt instead, sending its valuation plummeting in the process.
• Visit Business Insider's homepage for more stories.

When it comes to investing in WeWork, you could say that T. Rowe Price's investment team has some regrets.

In their letter to shareholders in the annual report of the firm's Mid-Cap Growth Portfolio, Brian W.H. Berghuis, chairman of the fund's investment advisory committee, and John F. Wakeman, the portfolio's executive vice president, said that the portfolios' stake in the commercial real-estate startup had brought them "outsized headaches and disappointments." The investment, which the portfolio made in 2014, was done with the understanding that WeWork would moderate its rapid growth and improve its bottom line, they said. Though the company took steps in that direction soon after T. Rowe Price's investment, it soon went back to its big spending ways, they said.

WeWork's profligacy eventually caught up with it. Its attempt at a public offering last summer collapsed in the face of investor concerns about its massive losses. After its IPO failed, its valuation collapsed from $47 billion to less than $8 billion, and it nearly went bankrupt before SoftBank bailed it out. The end result of all that was that T. Rowe's remaining stake in the company is now worth much less than what it once was, Berghuis and Wakeman said in the letter.

"While it's possible that WeWork's new management will improve operations somewhat, we are ready to declare this a terrible investment," they said.

The letter was an unusually frank assessment from a high-profile investor. T. Rowe Price led WeWork's Series D Round, in which the company raised $355 million at a valuation of $4.65 billion, according to PitchBook.

Berghuis, Wakeman, and their team have had misgivings about their WeWork investment for years now, particularly with regards to the company's corporate governance and the trustworthiness of its former CEO, Adam Neumann. Neumann at one point had iron-clad control over the company with 20 votes for each share he held and was the target of criticism for numerous personal transactions he engaged in with the company.

Adam Neumann promised WeWork would be profitable

The T. Rowe team was particularly incensed about the company's ever growing losses.

Neumann "promised profitability was just over the horizon," they said in the letter. "We did not take him at his word, and we communicated to WeWork's management and board our displeasure with its eroding corporate governance."

T. Rowe sold off a total of 16% of its stake in WeWork - recouping about half of its initial investment - in private transactions in 2017 and 2019, they said. They planned to sell off their remaining stake last year, but WeWork's management, which had veto power over the transaction, blocked the deal.

"It is clear that we misread the motivations of WeWork's management and our investment partners," Berghuis and Wakeman said in their letter.

Mutual fund companies have increasingly been investing in private startups, in part because companies are delaying going public until later in their lifespans, if they go public at all. Some policy makers and many in the finance industry have been pushing to make it easier for everyday investors and investment vehicles, such as mutual funds, to buy into startups. But some consumer advocates have raised concerns about that notion, because of the limited amount of financial information that private companies make public and the high risk of failure of such companies.

In their letter, Berghuis and Wakeman defended their portfolio's investment in private companies, arguing that their strategy shouldn't judged based on what happened with WeWork. The combined value of the portfolio's private investments comprised only 0.58% of its total worth, they said. Many of those investments have delivered good returns, and they provide insights into how industries are changing and future competition to the portfolio's public investments, they said.

"In short, we believe the WeWork debacle was an error in judgment, not in process," they said.

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• Read more about WeWork:
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• WeWork and other top startups were cut down to size in 2019. This VC thinks 30% of the more than 400 other unicorns will soon see their valuations slashed too.
• WeWork's meltdown was supposed to leave everyday investors unharmed. It didn't, and you probably don't even realize if your 401(k) took a WeWork hit.
• WeWork's turnaround plan calls for it to stanch its losses while opening hundreds of new locations. Here's why business and real-estate experts are baffled.