While this is certainly interesting and useful, mutual funds change their valuations so infrequently that it still doesn't give us a good read on the current valuation. I would love some someone to take the much harder step of tracking the secondary market for these shares.
I'll take the devil's advocate here and claim that it won't be near as useful as you'd think.
For 4 reasons:
1) Most of the mutual funds that hold these shares allow redemption's on a monthly basis so they'll evaluate their holdings on a monthly basis. Since companies like Fidelity do get to see the books for these companies these valuations are likely to be as accurate as you can get
2) It's very hard to evaluate the common stock for the reasons that everyone has talked about over the past year. Liquidation preferences. It's extremely hard to evaluate a private company as you have to evaluate 3 things.
- The value of the company itself
- Tease out the common shares value vs preferred shares vs liquidity preferences( this is the hardest step in my experience)
- Figure out what someone will pay for an illiquid name that they may not ever be able to sell
3) Even if you can evaluate what the common shares are worth, then what? You probably can't buy them, and once they go public your evaluation is worthless as the whole game changes, Liquidity preferences are gone, preferred share are rolled into public creating a new unknown number of common shares in the float.
You essentially start at zero in the evaluation process once it goes public and IPO prices are, as history has shown, often divorced from any fundamental values.
4) Even if you can buy share on the secondary markets, those prices are often moved by non fundamental elements. ie an employee who has been at the company for 8 years want's to sell some shares on the private market to buy a house may take less than full value just to get some money out as they'll view it as free money. On the flip side speculators may over pay to get into a startup that they view as being huge, like a snapchat.
The secondary markets are so illiquid that its' almost impossible to arb prices to make money, we've looked at it and tried. I'll let someone else try:)
I think this is a very fun idea for a piece of content, but it's important to add context when talking about how mutual funds value private companies, specifically regarding markdowns. I highly recommend anyone interested read this:
"While these markdowns have caused a big reaction from much of the media, the valuation write-offs aren't as overly indicative of an actual decline in the performance of these privately held companies—rather simply an accounting measure these funds have to abide by. Sure, some of these companies likely have their own business issues but the story is a bit overblown, so let's provide some context."
Wouldn't quite discount the markdown as some mere accounting formality. While I agree that markdowns, in many cases, are not indicative of fundamental company performance issues, they are clearly indicative of changing market sentiment (i.e. contraction of valuation multiples). Look, these are all clearly viewed as close to IPOs (otherwise, mutual funds would have no business investing in them), and it is only natural that they dip a bit when the overall market dips a bit (NASDAQ was recently ~20% off the highs in July last year). If you look at high quality public comps (e.g. WDAY), they are still ~20% off the highs, so it makes sense that private "unicorns" are marked down just about the same amount. Basically, these mutual fund valuations are as close as you get to how public markets would value these companies, simply because these mutual funds will be the top holders and buyers when the companies hit IPO.
54% chance to have made money if you bet on any of these exclusively from IPO. That's a good reason to diversify over everything, or better yet, wait and then go with the ones who've increased investor value over the past two years. Investment in individual stocks, especially startups, is significantly risky otherwise. It's good that some gamble enough to support on an individual basis though- without them putting their necks out on the line, very few would be in this list.
> wait and then go with the ones who've increased investor value over the past two years
Is there a specific reason you think trend following will be an effective strategy for that subset of companies (tech startups that IPOed 2 years ago)?
