US Congressional Acts: PM Insights Comments

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Chairman French Hill

Committee on Financial Services

2129 Rayburn House Office Building

Washington, DC 20515

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Ranking Member Maxine Waters

Committee on Financial Services

4340 O’Neil House Office Building

Washington, DC 20515

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Chairman Tim Scott

Senate Committee on Banking, Housing, and Urban Affairs

534 Dirksen Senate Office Building

Washington, D.C. 20510

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Ranking Member Elizabeth Warren

Senate Committee on Banking, Housing, and Urban Affairs

534 Dirksen Senate Office Building

Washington, D.C. 20510

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Dear Chairmen Hill and Scott, and Ranking Members Waters and Warren,

As you consider the Expanding Access to Capital Act, Empowering Main Street in America Act, and other legislation intended to spur capital formation in the public and private markets, I urge you to:

consider some of the key differences between the public and private markets, and
tailor your private markets solutions to address the heightened risks attendant to those markets.

In particular, I wish to focus your attention on the importance of accurate valuations in efficient capital formation and investor protection. Valuations drive investment decisions. They drive performance metrics. And they often drive fees paid to investment advisers and brokers. Inaccurate valuations lead to significant waste, fraud, and abuse – and often divert precious investor resources away from better investment options.

Improving the reliability and integrity of private market valuations should be a high priority.

I am the President and CEO of PM Insights, a private markets data, research, and analytics provider that helps investors accurately value their private market securities. University endowments, public-facing asset managers including mutual funds and ETF managers, registered investment advisors, and public pensions rely upon our services to provide them with more timely and accurate values/.

It is our experience – and that of many private market investors – that the valuations reflected in their account statements (to the extent they receive them) are often not reflective of accurate market pricing. Put simply, when an investor looks to sell a privately held security, whether a venture holding, private equity holding, or a stake in a private fund, the prices the investor is likely to sell at are often materially different – most often, lower – than the valuations they may see on their statements or other investment-related documents provided by the issuer or the broker who sold the investment to them.

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Part of this discrepancy is likely attributable to the very significant differences in how “valuations” are arrived at in the private markets. As shown here, the drivers for prices in private securities are often quite different than in public markets.

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Often, investors in private market securities are using “stale” prices that might be reflective of a venture funding round that may have occurred years in the past, or comparisons to public market securities that are imprecise proxies. As a result, in recent years, many of the largest, most sophisticated private markets investors have sold their private market securities at very significant discounts to their so-called carrying values.¹

For stakes in private equity funds, for example, Jefferies Financial Group estimated in 2024 that investors’ second-hand sales fetched an average of just 85 percent of the purported values assigned within six months before the sale.² In many venture and other private funds, recent disconnects between “valuations” and actual sale prices for investors have exceeded 50 percent.

Interestingly, valuation disconnects like those above are typically only made public because a public pension was forced to publicly recognize it, a private company or fund adviser is compelled to tell its other investors, or it is leaked to reporters.

In the public markets, by contrast, investors can simply look at the public tapes and see, to the millisecond, accurate quotations and trading prices.

We at PM Insights look to bridge some of that gap of information in quotations and execution prices. As the first and only, independent venture secondaries market data aggregator, which remains independent of any trading economics, we are privileged to be the closest comparison to TRACE or MSRB when large private companies’ stock changes hands.

To put this into perspective, Databricks, a VC-backed company held by many prominent 1940-Act funds was priced by a BNY Mellon fund at $90.23 on the same day that another fund managed by Morgan Stanley used a valuation of $66.81.³ These different valuations arise from different valuation practices and different subjective assumptions by different firms – even though they are for the same securities. Obviously, these differences may translate to massive changes in perceived performance and fees. See below chart showing composite market-based pricing (purple time series), versus 1940-Act fund NAVs in diamond plot points (common shares in purple & preferred shares in blue):

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Investors’ valuations should be driven by reality, not self-interested assumptions by asset managers or corporate executives. The best way to do that is to try to ascertain what an investor would be paid for those securities, if he/she had to sell them.

PM Insights deploys an objective, market-driven approach to tracking pricing in private assets, similar to how most fixed income instruments are priced by the most prominent data vendors such as S&P, ICE, LSEG, and Bloomberg. The top names covered by PM Insights, including SpaceX, CoreWeave, Stripe, ByteDance, Discord, OpenAI, Anthropic, among others, have combined valuations of $1-trillion dollars, and typically see many billions in monthly trading interests – none of which is required to be publicly reported. This is opaque and asymmetric market is one which PM Insights has added significant transparency to.

Accurate valuations of private securities are important for all investors, but perhaps more acutely so for smaller institutions or “retail” investors that may not be able to absorb a 15, 30, or 50 percent discount when they look to sell their holdings. Also, individuals are frequently less likely to be able to plan for withdrawals and manage cash flows, increasing the risks that they may be forced to sell at steep discounts.

To promote safe growth of private markets and protect investors, we recommend that federally or state registered investment advisers investing in private securities on behalf of customers be required to undertake best efforts to ascertain the “fair market value” of their private securities and portfolios. This rule could be modeled on the Fair Value Rule already exists for registered investment companies, and should be reflective of advisers’ best efforts to ascertain actual valuations… not simply accepting a number that was selected by the issuer’s CEO, or a small handful of investors during a capital raise a year ago, or a self-interested private fund adviser.⁴

While regulators in the United States have brought some limited cases against investment advisers for overtly fraudulent private securities valuations, there has not been a broader industry-wide review of even wildly inaccurate valuations.

That’s not the case in other jurisdictions. For example, in March 2024, the UK’s Financial Conduct Authority declared that it was “conducting a multi-firm review examining valuation practices for private assets, including examining the personal accountabilities for valuation practices in firms, governance of valuation committees, the information reported to boards about valuations and the oversight by relevant boards of those practices.”⁵ And in July 2024, the Chair of the Australia Securities and Investments Commission declared that the agency had set up a special unit to dive into private markets (and valuations in particular).⁶ These regulators, like our customers, believe that accurate valuations of private securities are essential to making markets work properly.

If private securities markets are going to fulfill their potential to ease capital formation challenges for companies, while offering strong risk-adjusted returns for investors, Congress and regulators must first ensure that the valuations of these securities are timely and accurate. This is becoming ever more pressing as a number of the largest private companies formed over the last decade are now very much at risk of default, or at best perpetually delaying an IPO, which is less so seen in an active market and more likely to be an adverse investor surprise. This concern was raised last week in an article on Bloomberg, stating, “A reckoning that has been looming for years is becoming painfully tangible.”⁷

I trust this is all quite timely, and thank you for your consideration. If you or your staffs would like to follow up, please reach out to me at nfusco@pminsights.com.

Sincerely,

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Nicholas Fusco

President & CEO

ApeVue Inc. (d/b/a PM Insights)

nfusco@pminsights.com

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‍¹_{See, e.g., Reuters, Fidelity marks down value of Twitter stake by 56%, Reuters, Dec. 30, 2022, available at}_{https://www.reuters.com/technology/fidelity-marks-down-value-twitter-stake-by-56-2022-12-30/}_{; see also,Antoine Gara, Harvard predicts looming markdowns to private fund holdings, Financial Times, Oct. 13,2022, available at}_{https://www.ft.com/content/e00fd280-3863-4a12-8dc5-017058590ebe}_{(quoting HarvardManagement Corporation CEO Narv Varvekar saying “managers have not yet marked their [privatesecurities] portfolios to reflect general market conditions... [and that marking venture funds to their lastfunding round] would “slow the process of moving existing valuations to fair value”).}

²_{Heather Gillers, Pensions Piled Into Private Equity. Now They Can’t Get Out, Wall St. Journal, June 15,2024, available at}_{https://www.wsj.com/finance/investing/pensions-piled-into-private-equity-now-they-cant-get-out-d3ca796d}_.

³_{PM Insights – Sourced from SEC ($value / number of shares):}

_{https://www.sec.gov/Archives/edgar/data/1056707/000177569724001018/xslFormNPORT-P_X01/primary_doc.xml}

_{https://www.sec.gov/Archives/edgar/data/1011378/000175272424273401/xslFormNPORT-P_X01/primary_doc.xml}

_{https://www.sec.gov/Archives/edgar/data/1011378/000175272424273407/xslFormNPORT-P_X01/primary_doc.xml}

⁴_{17 CFR § 270.2a-5.}

⁵_{Letter from Camille Blackburn, Financial Conduct Authority, Mar. 1, 2024, available at}_{https://www.fca.org.uk/publication/correspondence/portfolio-letter-asset-management-alternatives-supervisory-strategy-interim-update.pdf}_.

⁶_{Amy Bainbridge and Paul Allen, Australia Regulator Steps Up Private Markets Focus With New Unit,Bloomberg, July 23, 2024, available at}_{https://www.bloomberg.com/news/articles/2024-07-24/australia-regulator-steps-up-private-markets-focus-with-new-unit}_{(quoting Australia Securities and InvestmentsCommission Chairman Joseph Longo).}

⁷_{Katie Roof, The Unicorn Boom Is Over, and Startups Are Getting Desperate, Bloomberg, February 14,2024, available at}_{https://www.bloomberg.com/news/articles/2025-02-14/silicon-valley-unicorn-startups-are-desperate-for-cash}_.