How to value LP stakes in light of covid-19

David Larsen, a managing director at Duff & Phelps, says investors should seek guidance from their GPs as to likely discounts.

Limited partners wanting to value their fund interests amid the coronavirus crisis should start by calling their managers and asking for guidance on discounts, one of Duff & Phelps‘s top valuations experts has said.

Speaking on a webinar Wednesday about the impact of covid-19 on valuing investments, David Larsen, a San Francisco-based managing director at the advisory firm, said LPs are likely to receive the net asset valuations of their funds by the end of March which are based on 31 December.

In line with the American Institute of Certified Public Accountants’ valuations guide for private equity and venture capital, LPs should “cash adjust” their December net asset values and then take into account market movements, Larsen said.

“In this case, there are probably going to be market movements that are significant. How do I find that out? I could use a proxy for what I’m seeing in the overall market, probably not very precise,” he said.

“I probably would start by calling my managers and [asking] how much of a discount or how much down do you think this fund will be, and start using that as a proxy for how do I adjust the 12/31 value that effectively informs my limited partner or fund of funds financial statement at 3/31,” Larsen added.

A mismatch in pricing expectations between buyers and sellers during a market correction can lead to a dip in deal volume, Verdun Perry, global head of Blackstone’s Strategic Partners, told Secondaries Investor in December.

“Typically, the bid-ask spread widens and volumes decline during downturns,” Perry said. “It’s a short-term threat during downturns, but the volume decline usually doesn’t last long.” The secondaries market will continue to grow significantly in the long-run, he added.

Average high bids for private markets fund stakes fell 4 percentage points last year to 88 percent of NAV, according to data from Greenhill. Stakes in buyout funds dropped 4 percentage points to 93 percent of NAV year-on-year, while interests in venture capital funds fell 6 percentage points to 77 percent of NAV.