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Ayako Yasuda, UC Davis: Private Company Valuations by Mutual Funds
October 1, 2019 @ 11:00 am - 12:30 pm
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 fourth quarter follow-on funding events than funds ranked lower.