Using mutual fund marks in private market investing

Howe NgHead of Forge Data & Analytics

Mutual fund marks are actually not a very well-known dataset for people in the public market and are increasingly becoming more well known in the private market. What the dataset represents is a subset of institutional investors. These are big financial companies. You have BlackRock, you have Franklin, you have T. Rowe, you have Fidelity.

Because they are mutual funds in the U.S., they're regulated by the SEC. They are mandated to provide disclosure of how they actually value these securities. If you're a non-mutual fund, if you're just a venture capitalist, you do not have to disclose to the public in terms of how you actually value this set of securities. So, mutual funds provide us a window into how institutional investors think about valuation when it comes to private holdings in their portfolio.

This is very unique and also valuable information because it allows for price discovery to the extent that you actually want to know, hey, how do institutional investors value private securities? You can observe it through the mutual fund marks dataset, which we curate and collect at Forge Data.

Mutual fund marks are an important source of price discovery dataset. Mutual funds are usually run by institutional investors. These institutional investors participate in the primary rounds of the company.

In doing so, they get on the company's cab table. By getting on the company's cap table, they receive more information rights than other investors who are not on the cab table. The information includes board decks, financials on a quarterly basis. That information is very valuable when it comes to valuing what the company's price is currently. Because they are mandated by the SEC to mark to market their holdings, they are actually expressing their pricing view through a regulatory reporting that we also curate and collect and assess from a Forge Data perspective.

In the down market, data is actually more important. So, we are starting to see that mutual funds are marking down their positions when it comes to the private holdings that they have in the portfolio. Over half the mutual fund marks right now that we observe are actually below the last funding round. That means they're marking the current value of the holdings relative to the last funding round lower. And then the more interesting thing is that of that dataset, about 65% of the unicorn companies are also getting marked down.

So, it seems like the larger companies, the unicorns are getting marked down more than the smaller companies. When you think about what you're actually measuring, you are measuring the current price, expressed by the mutual fund, versus the last primary funding round. When it comes to unicorns, they're typically big, they're well-capitalized. They probably did not have to raise a lot of funding the last couple of years when we were in a bubble environment. So, they basically set the last funding round price at a higher valuation and then never changed because they never had to do another primary funding round.

The smaller companies typically are not as well capitalized, so they couldn't afford to just raise once and not do anything again. So, they actually probably incrementally raise, compared to the unicorn. When you compare something to a longer price point that is more stale, you potentially have a bigger gap. Versus when you're comparing something to a more recent price point that is more fresh, which is what the smaller companies have to do, you probably have a smaller gap.

So, it's a function of the recent bubble, it's a function of the size of the company and it's a function of time.

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