I spent Tuesday lunchtime this week participating in a Webinar as a panellist in front of an audience of 400 members of the BVCA (British Venture Capital and Private Equity Association). The discussion centered around the valuation of investments in the immediate aftermath of liquid market downturns. It was an interesting discussion and my preparation allowed me to reconsider our own approach to valuation of private equity assets.
The most common refrain from private equity managers of funds that Sandaire clients are invested in, when we ask about performance and valuation, is along the lines “the honest answer is we don’t know”. Very few of our funds have issued 31 March valuations, several are still circulating their December valuations and in some cases we are still looking at September valuations. In practice, with the partial rebound of equity markets since 31 March, any valuation carried out at that date will be as out of touch as any valuation at December.
The volatility in public markets highlights that a more measured approach from the private equity industry is not necessarily a bad thing. Special guidelines by the International Private Equity and Venture Capital Valuations Committee were issued on March 31 and made several key points – among them that valuations should remain ‘fair’ valuations, not a fire sale price; and generally speaking managers should not deviate their policies and procedures in response to these changed market conditions.
We are reviewing our portfolio and discussing with our fund managers and company management teams how COVID-19 is impacting their business and prospects. In respect of funds, we do not expect ‘cliff-edge’ valuations at March 31 and it is only as the pandemic evolves that managers will be able to assess the long term prospects for businesses in their portfolios.
Undoubtedly the challenges will see performance decline but as I have commented previously, private equity managers take a long term view and experience of the last downturn suggests these managers will focus on every asset so it will be returns that suffer in the interest of returning capital in the long term. What previous experience also teaches us is that private equity investments made during or immediately after a downturn, can offer some of the strongest returns.