Private Company Valuations by Mutual Funds

38 Pages Posted: 8 Nov 2017 Last revised: 21 Aug 2018

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: May 25, 2018

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 173 private securities issued by startups that are simultaneously held by an average of 7.4 mutual funds. Price dispersion across fund families averages 10.4% for funds holding the same security, while it is only 2.4% for funds within a family. We find that the reported prices of private securities are frequently stale: 44% 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. Followon 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 followon 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). We further provide preliminary evidence consistent with strategic marking of private securities by fund managers to improve their periodic fund returns.

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 (May 25, 2018). 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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