Pin the Value On the Uni­corn

April 4 — April 10, 2016 ▶ ▶ Some of the big­gest mu­tual funds dis­agree on the worth of star­tups ▶ ▶ Pick­ing the right num­ber “is as much an art as it is a science”

Bloomberg Businessweek (North America) - - Markets / Finance -

With hopes of get­ting in early on the next big ini­tial pub­lic of­fer­ing, man­agers at some of Amer­ica’s top mu­tual fund com­pa­nies have plowed bil­lions of dol­lars into Drop­box, Palan­tir Tech­nolo­gies, Snapchat, Uber Tech­nolo­gies, and other star­tups still in ven­ture cap­i­tal mode.

Now, af­ter a year of volatile eq­uity mar­kets and a drop-off in IPO ac­tiv­ity, fund com­pa­nies are pulling back on mak­ing pri­vate deals. Even so, funds still have to up­date their es­ti­mates of what ex­ist­ing in­vest­ments are worth. Their dis­clo­sures have be­come one way mar­ket watch­ers track the ris­ing and fall­ing for­tunes of Sil­i­con Val­ley’s “uni­corns”—pri­vate com­pa­nies that have touched $1 bil­lion or more in in­vestor val­u­a­tion. But putting a price on shares that aren’t reg­u­larly traded is nei­ther easy nor ab­so­lute.

“You can put three ex­perts to­gether and come up with three dif­fer­ent an­swers,” says Jeff Grabow, head of the val­u­a­tion prac­tice at con­sult­ing firm EY. “Val­u­a­tion is as much an art as it is a science.”

Con­sider the cloud stor­age com­pany Drop­box. Five of its fund com­pany share­hold­ers had dif­fer­ent val­u­a­tions on 16 oc­ca­sions, ac­cord­ing to Bloomberg’s anal­y­sis of se­cu­ri­ties fil­ings. In De­cem­ber, T. Rowe Price set a value of $9.40 a share on its hold­ings. In the same month, Hart­ford Fi­nan­cial Ser­vices Group val­ued Drop­box 62 per­cent higher, at $15.20 a share.

A spokesman for T. Rowe Price said a lack of dis­clo­sure rules means some in­vestors may have more in­for­ma­tion than oth­ers. A Hart­ford rep­re­sen­ta­tive de­clined to com­ment.

Pri­vate com­pa­nies are a small slice of mu­tual fund port­fo­lios—t. Rowe Price, for ex­am­ple, says in to­tal they will never make up more than 5 per­cent of any one of its funds. But how man­agers value them does af­fect fund in­vestors. Each day a fund sets a share price for it­self based on the un­der­ly­ing value of its as­sets. (For a pub­lic com­pany, that’s easy: Look at the stock quote.) If a mu­tual fund over­val­ues an as­set, those who sell shares get a lit­tle too much money back, di­lut­ing the value of ev­ery­one else’s in­vest­ment. If the as­set is un­der­val­ued, new in­vestors get to buy shares at a lit­tle too low a price.

T. Rowe Price and Van­guard Group, an­other Drop­box in­vestor, have spe­cial pric­ing re­view com­mit­tees to look at their pri­vate shares. Van­guard, like Hart­ford, put Drop­box at $15.20 share in De­cem­ber. The com­mit­tee at Van­guard takes into ac­count the val­u­a­tions used by out­side money man­agers hired by its funds, plus other data in­clud­ing the price of sim­i­lar com­pa­nies al­ready trad­ing on the stock mar­ket. For Drop­box, pub­licly traded ri­val Box might make a good com­par­i­son.

“Where comps are avail­able, that’s great; where they’re less avail­able, it’s a lit­tle heav­ier lift,” says Glenn Booraem, con­troller of the Van­guard funds. “Our ap­proach has been con­sis­tent over time. How­ever, no two of these deals are iden­ti­cal in terms of the val­u­a­tion process that we can ap­ply.”

It’s likely that fund com­pa­nies also keep an eye on how their peers value the same star­tups, says Jay Rit­ter, a for­mer trus­tee at

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