If you want to know how bizarre the financial world is, look at the different ways two mutual fund companies value the same security: this is the former Twitter, now called 'X'.

Twitter was taken over in October 2022 by Elon Musk, CEO of Tesla (TSLA.O) and 'King of Tech'. He had 19 co-investors in this deal, including Fidelity and Baron Capital, both of which manage mutual funds.

As a result, some funds under Fidelity and Barron ultimately held shares of 'X'. Although 'X' is not publicly traded, Fidelity and Barron must value these shares as investors buy or sell fund shares based on the fund's net asset value per share.

There are significant differences in how Fidelity and Barron value 'X', especially with Barron's valuation being particularly volatile.

By the end of last year, Barron's valuation was more than twice that of Fidelity. Now, Fidelity's valuation might—or might not—be higher than Barron's.

Ron Baron, founder of Baron Capital (not to be confused with Clarence Barron, founder of Barron's), is a devoted fan of Musk and a very expressive businessman.

For example, last month, the Baron Investment Conference held at Lincoln Center in New York attracted thousands of investors, three of whom won Tesla cars given away by Baron. The conference also continued the tradition of featuring a famous singer as the finale, inviting five-time Grammy winner Michael Bublé to perform.

In addition to shares of 'X', the Barron and Fidelity fund families have also invested in Musk's Tesla, SpaceX, and X.ai.

Seeing how Barron and Fidelity almost immediately impaired 'X' after the Twitter transaction makes one wonder if part of the reason both companies invested in 'X' was to please Musk.

Jack Shannon, a senior analyst at Morningstar, stated, 'These funds are buying shares in a private entity with no exit plan. This situation is extremely rare.'

Fidelity declined to comment on this. Musk did not respond to my email—not even with his famous 'poop emoji'.

A spokesman for Baron Capital responded to my question about why 'X' was given such a peculiar valuation. The spokesman stated that Barron's 'Fair Valuation Committee, overseen by an independent committee of the fund's board, relies on appropriate metrics to value non-public securities.'

Barron's spokesman also mentioned that 'X' constitutes a very small portion of Barron's assets, which applies equally to Fidelity.

Fidelity valued 'X' at 100% of cost on October 31, 2022 (four days after the transaction was completed), but by November 30, that valuation had dropped to just 43.88%. This means Fidelity's investment of $316 million resulted in a loss of $177 million for its investors in just one month.

Barron invested $100 million, and as of December 31, 2022, its valuation of 'X' was 70.20% of cost. This resulted in a loss of $29.8 million for investors within two months. (Barron only discloses quarterly data, while Fidelity discloses monthly.)

While Fidelity gradually lowered its valuation of 'X', Barron significantly raised its valuation to 89.52% of cost in the first quarter of 2023.

Subsequently, Barron significantly lowered its valuation in the second quarter, saw a slight increase in the third quarter, but then cut its valuation by more than two-thirds in the fourth quarter.

This raises the question: where do these huge valuation discrepancies come from?

After Barron's significant downgrade of 'X' at the end of 2023, Barron's and Fidelity's valuations entered the same range for the first time. Previously, Barron's valuation of 'X' had been much higher than Fidelity's.

Then in October of this year, Fidelity suddenly raised its valuation from 21.29% in September to 28.13%. What prompted this 32% increase? Fidelity declined to explain.

Barron may have also increased its valuation of 'X' in October, but because its data is disclosed quarterly, any changes will not be seen until the report at the end of 2024. (Barron declined to provide its October valuation.)

Whether using Barron's or Fidelity's valuation data, it is clear that the acquisition of Twitter has been a financial disaster for Musk and his co-investors so far.

According to calculations, Musk and his team have invested approximately $33 billion in 'X'. This includes an acquisition cost of $44 billion, plus about $2.5 billion in other expenses, minus $13.5 billion in debts from 'X'.

Even with Fidelity's latest higher valuation, the original $33 billion equity has shrunk by about $23.7 billion. Musk lost approximately $18.6 billion, while his co-investors (who invested $7.1 billion) lost about $5.1 billion.

Of course, Musk, the world's richest person, might laugh it off, but for Barron, Fidelity, and Musk's other 17 co-investors, these huge losses are no laughing matter.

Article republished from: Jin Shi Data