Abstract

Using a novel dataset of U.S. buyout and VC investments, we study the informativeness of managers’ interim valuation reports of portfolio companies on final outcomes. We find that when investors assess the performance of individual portfolio companies, they can do better than just relying on the most recent reported valuation. The history of reported valuations is informative as well. Particularly for buyout funds, portfolio company investments with greater past staleness or more frequent markdowns tend to perform more poorly in the future than other investments. Moreover, investments with larger reported interim marks tend to have lower future returns. That is, past reported returns negatively predict future realized returns. Based on this predictability, the combined knowledge over interim multiple, past staleness, and past markdown frequency can help predict whether an investment will end up in the left or right tail of all investments. These predictions are informative as early as the first year of the investment.

Authors

Ege Y. Ercan, Stanford Graduate School of Business
Steven N. Kaplan, University of Chicago, Booth School of Business
Ilya A. Strebulaev, Stanford Graduate School of Business