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WeWork’s Wild Valuation Ride

The problems of pricing private placements in open-end funds.

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At this point, it’s not clear if WeWork, the troubled office-leasing firm, will ever go public. But even if it doesn’t, the notoriety surrounding the firm’s delayed initial public offering could have a long-term impact on open-end mutual funds through fostering greater scrutiny of their private placement valuations. That’s not the only lesson to draw from WeWork’s precipitous decline as concerns about its business model have multiplied, but it is an important one.[1]

Indeed, open-end funds’ pricing of WeWork shares varied not just between asset managers but in one case among funds using the same subadvisor team. The discrepancies illustrate the problem of pricing private placements in investment vehicles that require daily liquidity. In the absence of the market setting a closing price, big valuation gaps sometimes appear. As a result, much lower valuations hurt sellers and help buyers of open-end mutual funds, while much higher ones do the reverse.

Alec Lucas does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.