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

This paper analyzes valuation dynamics of ‘Unicorn' companies, that is, privately held and venture capital-backed companies with a valuation of at least $1 billion. In recent years, Unicorns have received substantial investments from U.S. mutual funds, whose public reporting allows for rare insight into the pricing of these opaque assets. We study the pricing data for 223 investments made by 80 separate funds of 8 U.S. mutual fund managers into 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 (cash flow) 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 a variety of important implications for investors and regulators, especially by highlighting the behavioral issues in the pricing of Unicorn shares, and by providing empirical evidence of the discrepancy between investors' share class valuations and the publicly reported ‘headline' valuations of Unicorns