Private Company Valuations by Mutual Funds

36 Pages Posted: 8 Nov 2017 Last revised: 23 Jan 2018

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: November 18, 2017

Abstract

We study the effect of private start-up holdings on mutual fund NAVs and daily returns using the quarterly disclosures of mutual fund holdings. We identify over 100 private securities issued by startups that are simultaneously held by an average of 11.6 mutual funds. Price dispersion across fund families averages 8.4% for funds holding the same security, while it is only 1.2% for funds within a family. We find that the reported prices of private securities are frequently stale: 40% of prices are not updated between quarters. We conjecture and find evidence that funds update private security prices when startups close a new funding round, which establishes a new valuation for the company. Follow-on funding round events generate large valuation changes for private holdings, which affect fund NAVs and lead to predictably strong fund returns in the days after the follow-on round, which is often anticipated by industry observers. Consistent with this interpretation, the fund returns after follow-on funding events are positively related to the economic significance of the private security valuation change for the fund (the product of the private security weight in the fund portfolio and the security’s deal-over-deal valuation change).

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 (November 18, 2017). Asian Finance Association (AsianFA) 2018 Conference. 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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