COVID-19’s Effect on Valuations

Gen II Fund Services, a provider of private equity fund administration services, has just released the results of a survey on how COVID-19 is affecting the valuations of private equity portfolio companies.

Results of the survey show that approximately 80% of private equity firms believe there could be up to a 25% reduction in the value of portfolio investments in their first quarter valuations. As expected, the survey also shows that there is a high degree of uncertainty regarding the long-term effects of COVID-19 on investments and as a result, traditional methodologies for valuing portfolio investments are less reliable.

To address this, private equity firms are considering using a combination of valuation approaches, including public company comparables, third party valuation services, and adjustments to previously applied valuation methodology. “The survey gives our clients important insights into how private equity sponsors are thinking about valuations under these unprecedented circumstances,” said Steven Millner, the co-founder and managing principal of Gen II.

Gen II surveyed over 150 of its clients from April 8, 2020 through April 24, 2020. The survey respondents are principally invested in buyout, real estate, energy and infrastructure, credit, and fund-of-funds strategies.

“Our clients view us as their trusted advisors, in line with this role it is important for us to understand and share industry trends and perceptions as they are occurring,” said Norman Leben, a co-founder and managing principal of Gen II.

Other interesting findings from the survey:

  • For recently acquired portfolio investments, close to 70% of respondents will be holding investments made within the last 12 months at cost;
  • Respondents expect to provide additional capital of up to 25% of their portfolio investments;
  • 80% of respondents will primarily be relying on public market comparables in conjunction with other metrics in conducting their portfolio company valuations;
  • Approximately 70% of respondents believe that the effects of COVID-19 will not impact their fund economics; and
  • Private equity firms generally intend to report the effects of COVID-19 on a quarterly basis to their investors

Gen II Fund Services is a provider of private equity fund administration services including operational infrastructure, financial reporting, and investor communications. The firm has offices in New York City, San Francisco, Boston, Stamford, Dallas, and Luxembourg.

Private Equity Professional | May 7, 2020

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