Private Company Valuations by Mutual Funds
38 Pages Posted: 8 Nov 2017 Last revised: 21 Aug 2018
Date Written: May 25, 2018
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: Suggested Citation