by Val Cipriani, Investors Chronicle, February 21, 2024:
The valuations of private assets have increasingly come under scrutiny in the past two years, as inflation and higher interest rates sent listed company values on a rollercoaster but left the likes of private equity relatively untouched.
Private investors typically get exposure to private assets through investment trusts. Since 2022, discounts to net asset value (NAV) have been especially high for trusts investing in unlisted assets, hinting at a degree of mistrust over the underlying valuations, as well as low demand for the shares..
Private equity is perhaps the sector that is scrutinised the most for its approach to valuations. The valuation process is carried out by looking at a range of metrics, which typically include the initial cost of the company, comparisons with similar listed companies, and comparisons with similar private transactions. Each metric makes up a portion of the overall valuation, but the balance changes over time – for example, a company that was just acquired might be held at cost value for a year, but afterwards the listed and unlisted comparables make up a bigger portion of its valuation..
A helpful aspect of all this is that the valuation lag in private equity absorbs some of the volatility of public markets. For example, when share prices shot up in 2021, private equity managers did not typically increase valuations to the same degree. Arguably, therefore, their NAVs did not need to come down quite as steeply when the public markets’ downturn hit the following year.
One metric that can help investors assess a private equity manager’s track record is the average exit uplift..
James Carthew, head of investment company research at QuotedData, says that most of the companies in which private equity investment trusts invest are cash generative, which makes the valuation process easier. But growth capital and venture capital assets are harder to value.
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