SEC eyes unicorn valuations

Funds are using a range of valuation methodologies for unicorn companies, raising a red flag for the regulator.

Fund managers should establish a uniform valuation methodology for unicorns to avoid falling foul of the US Securities and Exchange Commission, according to panelists at a webinar hosted by valuation firm Voltaire Advisors.

The regulator has recently been taking a closer at methodologies for valuing unicorns – early stage companies believed to be worth over $1 billion. Given the current lack of a uniform approach to methodology used to value startups, there can be significant differences in outcomes among funds, panelists said.

“The SEC is focused on registered investment companies valuing the same assets at the same price,” one panelist said. “They want to see some kind of a uniform valuation policy.”

It is also important to reflect the market’s perception of the company during the valuations process, said Rajan Chari, a partner at Deloitte & Touche and co-author of the annual Deloitte Fair Value Pricing Survey.

One of the biggest differences in valuing unicorns and other established companies is that the fund has to determine what a market participant would think, who those market participants are, and what the ultimate exit for the investment might end up being, he said.

News stories about the company become part of the valuation of these companies, Chari said, and advised that funds should step back after the valuation process and ask themselves whether the value makes sense and reflects what has happened relative to the portfolio company.

“It’s about doing things consistently, with the consistent application of the valuation technique,” he said. “It’s never bad to revisit your policies and procedures. Just make sure you feel comfortable there’s sufficient detail to support your rationale and the conclusions you have reached.”

Panelists expect that the SEC’s focus on unicorn valuations, which began in 2016, will continue.

“It’s safe to say no one has any belief that this topic will go away in 2017 and that’s because [nominee to chair the SEC] Jay Clayton himself is focused on IPOs and expanding capital markets,” the first panelist said. “I haven’t seen anything indicating that actually acquiring these assets is not appropriate. They’re just focused on valuations of them.”