Private Company Valuations by Mutual Funds
51 Pages Posted: 8 Nov 2017 Last revised: 25 Dec 2018
Date Written: December 21, 2018
We study how cross-sectional and temporal variation in valuation practice of private start-up holdings by mutual funds affects investors’ access to these pre-IPO firms. Price dispersion across fund families holding the same security averages 10.0%, and is as large as 25% in some quarters. 42% of reported prices are not updated between quarters but large valuation changes occur when startups close a new funding round. Thus, follow-on rounds lead to predictably strong fund returns in the days after the event. Fund families tend to allocate private securities to their best performers and high-fee funds. Moreover, fund managers with incentives to boost periodic returns mark up their private securities more aggressively after the year-end follow-on rounds. We also find weak evidence of strategic return smoothing with lower incidence of markdowns of private securities in bear markets.
Keywords: Mutual funds, Venture capital, Entrepreneurial firm, Private valuation, Stale prices
JEL Classification: G23, G24, G32, M13
Suggested Citation: Suggested Citation