Private Company Valuations by Mutual Funds.

This article investigates how mutual fund families value their holdings in private startup companies and the implications of these valuation practices for fund returns and investor behavior. It finds significant cross-sectional variation in private security valuations across fund families, driven primarily by differences in information costs and access: families with larger private equity (PE) holdings or greater stakes in funding rounds update valuations more independently and more frequently in the absence of public news, resulting in less stale pricing and reduced return predictability around follow-on financing rounds. The study finds no empirical support for litigation risk or strategic incentives as major determinants of valuation practices. Additionally, funds with high PE exposure exhibit greater financial fragility, as investors redeem shares more aggressively following poor fund and venture capital market performance, highlighting potential run risks associated with illiquid private securities in open-end mutual funds.