Private Equity and Venture Capital funds are an alternative asset class that just like many other asset classes in the asset industry, has been affected by the current 2020 crisis.
As a private capital investor, there is a critical need for alternative asset managers to practice these ipev guidelines.
The International Private Equity and Venture Capital Valuation Guidelines Board (“the IPEV Board”) provides special guidance for investors to value private companies during this time of crisis.
What are the IPEV Valuation Guidelines?
- Estimating Fair Value does not equal a “fire sale” price. Instead, it represents the amount that would be received in an orderly transaction using market participant assumptions in the current market environment.
- Government subsidies and initiatives should not be modeled in portfolio companies until it crystalizes or can be reasonably assured.
- Inputs should be compared fairly to comparable public companies. This applies to both relative and absolute valuation methodology.
- It may no longer be appropriate for recent transaction prices especially those from before the pandemic receive significant weight in determining fair value.
IPEV has further equity and venture capital valuations guidelines regarding specific types of investments such as Equity and Debt Investments.
- The impact of the crisis on the portfolio company’s revenue/customer, supply chain, and operations must be rigorously considered.
- Appropriate multiples must be determined which reflect the current market environment including risk and uncertainty in projections and historical results.
- Greater uncertainty translates into greater risk and increased required rates of return.
- A scenario analysis should be used to assess and incorporate the possibility of the crisis extending for 3,6,12,18 months or longer.
- Liquidity needs must be evaluated:
- What is the likelihood of a debt covenant for private equity?
- What is the impact of extended reduced cash flow to private equity?
- What is the source of working capital to run the private equity if impacted by a crisis?
- Valuations of debt investment, in the absence of actively traded prices, are generally derived from a yield analysis considering credit quality, coupon, and term.
- Valuing may depending on the facts and circumstances, be equal to par, face, or cost value.
- Credit quality (repayment risk) must be assessed like the Equity questions above.
- Non-performing debt is considered differently from performing debt.
- Credit spreads have widened for various industries, credit ratings, and terms
In conclusion, every investment will need extra analysis given the current market condition and uncertainty. Private capital investors will be best served by providing timely fair value information. Even in volatile dislocated markets, applying the ipev valuation guideline will give investors the most reliable and relevant information. Fund Managers should practice the ipev board valuation guidance to the best of their abilities.
If you have any questions, feel free to reach out and talk to us regarding private equity and venture valuations.