The Pricing of Private Assets: Mutual Fund Investments in ‘Unicorn’ Companies

Abstract

This paper analyzes valuation dynamics of ‘Unicorn’ companies, that is, privately held venture capital-backed companies with a valuation of at least $1 billion. We study the pricing data for 223 investments made by 80 separate funds of 8 U.S. mutual fund managers in 98 Unicorns. In line with price ‘anchoring’ and ‘reference’ theories, our results show that external factors, such as the valuation of peer companies, are the primary driver behind Unicorn stock pricing. Analyses of the stock price patterns additionally reveal the importance of shareholder rights: different share classes with different cash flow rights issued by the same Unicorn are priced differently at the same point in time, even by the same shareholder. Our research creates important implications for investors and regulators, especially by highlighting the behavioral patterns in the pricing of Unicorn shares, and by providing empirical evidence of the dynamics behind discrepancies in investors’ share class valuations.