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Fidelity’s ‘Unicorn’ Valuations Were Just Proven To Be Bogus

April 28, 2016, 5:47 PM UTC
A Fidelity Investments store logo is pictured on a building in Boca Raton, Florida
A Fidelity Investments store logo is pictured on a building in Boca Raton, Florida March 19, 2016. REUTERS/Carlo Allegri - RTSB9TE
Photograph by Carlo Allegri — Reuters

Fidelity Investments soon will publish its monthly holding reports, which include the carrying values of underlying securities—including stock in privately-held companies—that are held by its myriad of mutual funds. And, if recent history is any indication, we’ll see blaring headlines about how popular tech “unicorns” like Dropbox, Snapchat, and Uber have been marked up or down.

But we shouldn’t, as evidenced by today’s new that AbbVie Inc. (ABBV) will be acquiring cancer drug startup Stemcentrx.

Fidelity first invested in Stemcentrx in August 2015, via a $250 million Series G round that gave the company a post-money valuation—meaning what the company was worth including the funds it raised—of around $5 billion. That valuation is less than the $5.8 billion that AbbVie is paying up-front for Stemcentrx, not to mention the redistribution of Stemcentrx’s cash on hand and up to another $4 billion in possible earn-outs. In short, this is an investment win for Fidelity.

Unfortunately, you wouldn’t have been able to predict that by viewing Fidelity’s most recent monthly valuation report (as of February 29), which had Stemcentrx marked down a whopping 37.75% from the time of its original investment. We don’t know why Fidelity was way off, except that it was.

Last month I swore off writing monthly stories about Fidelity or other mutual funds revaluing their private company portfolios, due to the opacity of how they make such determinations. Moreover, mutual fund managers rarely receive detailed financial or strategic reports from these companies on a monthly basis, nor do they typically have representatives on boards of directors (even in an observer capacity). As such, many of these monthly marks are valuation committee guesswork, more likely to engender confusion than clarity.

Certain readers chided me for the decision, but I think today’s news is pretty good evidence that they should reconsider. After all, if Fidelity was so wrong about Stemcentryx, why would anyone trust its carrying value of Pinterest or Zenefits? The real question is if other media outlets will do right by their readers, or do right by their click count. We’ll know soon.