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Covid ‘bounce’ a valuation quandary for secondaries buyers

Business that have benefitted from the coronavirus crisis are as difficult to value as those that have suffered, says Glendower Capital's CIO at the annual BVCA Summit.

Companies that have been given a boost by the coronavirus pandemic still represent a valuation headache for secondaries buyers, according to the chief investment officer of Glendower Capital.

Speaking on a panel at the British Private Equity & Venture Capital Association Summit last week, Charles Smith said it is as difficult to take a view on these businesses as those that have been negatively affected.

“You are underwriting some sort of reversion to the mean, but if a company is in a sector that’s benefited, and they’re running at 150 percent of last year, is that going to come back to 100 percent or will it go south of that?”

The easiest companies to underwrite are those that were minimally impacted or those that were impacted but are now back to normal, he added.

The covid-19 crisis represents “as acute an example as you will ever see” of valuation lag, said Greg Ciesielski, a principal with HarbourVest Partners.

In late March public markets were down by more than 20 percent compared with prior to the onset of the crisis in February, while private assets were still being priced off third-quarter net asset values. GPs then took different approaches to valuing their portfolios in the first- and second-quarter – some adjusting more in line with public markets, others with asset performance.

“There’s been … difficulty assigning value on both sides of the trade,” Ciesielski said. “On the LP portfolio side of the market, you are seeing a delay in that dealflow as we wait for a solid [valuation] basis to come back. I expect it to pick up dramatically over the next period.”

GPs “often take quite a positive view on recovery” when formulating their coronavirus-adjusted EBITDA projections, added Neuberger Berman managing director Philipp Patschkowski, which is something else for buyers to be aware of.

While few LPs feel pressure to seek liquidity, delayed exits combined with record recent private equity fundraising means that their portfolios could turn cashflow negative in the near-term, he added.

“If history is a guide, that should lead to increased volume in transactions where investors reconsider their allocations, think about rightsizing out of certain vintage years or reducing exposure in areas which are non-core to their current philosophy,” Patschkowski said.

The panel was chaired by Andrew Rearick, international counsel with Debevoise & Plimpton.