Inside How Mutual Funds Value Private Tech

The sudden and sizable valuation markdowns of high-flying private companies like Snapchat, Dropbox and Zenefits by mutual fund investors has been one of the biggest stories in tech, sowing fears that the market is deflating. They’ve also caused consternation among founders, who have had to defend their companies’ earlier valuations to employees.

Yet the markdowns are one of the least understood phenomena in tech, as the funds are tight-lipped about how they come up with those valuations and why they change.

A close reading of publicly filed disclosures, however, sheds substantial light into what’s happening, and how funds are valuing major private companies like Uber, Didi Kuaidi, Palantir Technologies and Snapdeal.

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Though their approaches can vary, the funds say their valuation processes are thorough. A Hartford Funds spokeswoman said its private investments “are subject to a careful, thoughtful due diligence and valuation process.” A T. Rowe spokesman said, “We regularly make judgments, using a wide variety of sources and information, to establish and adjust valuations of these securities as circumstances warrant.” He did not comment on specific company valuations.

John L. Connell commented on this article.
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Private tech holdings can also be discounted due to illiquidity, or when their shares cannot be sold as easily as shares of a public company.