Private Company Valuations by Mutual Funds

55 Pages Posted: 8 Nov 2017 Last revised: 9 Jun 2019

See all articles by Vikas Agarwal

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Brad M. Barber

University of California, Davis

Si Cheng

Chinese University of Hong Kong - Department of Finance

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Ayako Yasuda

University of California, Davis - Graduate School of Management

Date Written: June 6, 2019

Abstract

Mutual funds that invest in private securities value those securities at stale prices. Prices change on average every 2.5 quarters, vary across fund families, and are revised upward dramatically at follow-on funding events. The infrequent, but dramatic price changes yield predictably large fund returns. Fund investors can exploit the stale pricing by buying (selling) before (after) the follow-on funding events (though we find little evidence of this behavior to date). Fund families can opportunistically save up and unleash dry powder (unused markup of private securities) when doing so helps their high-priority funds get to the top of league tables at year ends. Consistent with these incentives, funds near the top of league tables increase private valuations more around 4th quarter follow-on funding events than funds ranked lower.

Keywords: Mutual funds, Venture capital, Entrepreneurial firm, Private valuation, Stale prices

JEL Classification: G23, G24, G32, M13

Suggested Citation

Agarwal, Vikas and Barber, Brad M. and Cheng, Si and Hameed, Allaudeen and Yasuda, Ayako, Private Company Valuations by Mutual Funds (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3066449 or http://dx.doi.org/10.2139/ssrn.3066449

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Brad M. Barber

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Si Cheng

Chinese University of Hong Kong - Department of Finance ( email )

12/F, Cheng Yu Tung Building
No.12, Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.bschool.cuhk.edu.hk/index.php/faculty-staff/show-alltest?pid=496&sid=3939:Cheng-Si

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.bschool.nus.edu.sg/staff_profile/cv.asp?ID=3

Ayako Yasuda (Contact Author)

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-0775 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.ayakoyasuda.com

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