Investors predict uneven reset in private markets valuations

Investors and managers say that valuations are likely to come down faster in the U.S., particularly in venture capital-backed technology startups, with potential write-downs in private equity likely to stretch over a longer period.

Public stock volatility, rising interest rates, inflation and slower growth are straining many corporate balance sheets, both in public and private markets. But as private-equity firms start to report their fourth-quarter valuations, many have yet to reflect how those pressures are hitting their bottom lines.

Imogen Richards, a partner at private markets firm Pantheon Ventures who spokelast weekat the International Private Equity Market conference in Cannes, France, said she hasn’t seen significant valuation drops in the private market, even as secondhand stakes in funds are pricing at discounts to their reported underlying values.

“The question is, if Q4 isn’t being written down, is Q1 going to be written down?,” Ms. Richards said, noting that the firms may be particularly reluctant to revalue their portfolios if they are seeking capital for new funds.

“They’re also fundraising, so it’s not going to really help them to write down those assets,” she said. “But then, on the other side, there’s obviously macroeconomic factors, which are pushing those valuations down.”

Secondary market pricing has already shown a gap in valuations between venture and buyout assets in the U.S. Average pricing for secondary stakes in U.S. venture-capital assets fell to 68% of net asset value in 2022 from 88% a year earlier, according to a report issued by investment bank Jefferies Financial Group Inc. Average pricing for U.S. buyout assets fell to 87% of NAV in 2022 from 97% the previous year, according to the report.

Alessandro Tappi, chief investment officer at Luxembourg-based European Investment Fund, said the secondary market remains healthy, making it unlikely that investor “fire sales” are driving the pricing declines. He said he believes the valuation gap will continue until at least the end of the year.

“We are not yet where we will be ending up,” he said during the IPEM conference.

Mr. Tappi and others said they expect downward adjustments in private-equity valuations to be more gradual and take place over a longer period.

Private-equity firms tend to invest in more mature companies than their venture-capital peers, which often back startups that need to raise money more frequently, leading to periodic reassessments of their value.

Ivan Vercoutère, co-founder and managing partner of alternative asset management firm LGT Capital Partners, said he is not sure if general partners will write down their valuations at all. Many companies were able to blunt the impact of inflation on their profit margins by passing on higher prices to their customers in 2022, although Mr. Vercoutère added that may change in 2023.

“The rationaleis, ‘We bought them with certain expectations. Those expectations are being met, therefore we’re not changing the valuation,’” Mr. Vercoutère said. “The question to ask the general partnersis, ‘Ifyou were buying that same business today, what would you pay?’”

In Europe, meanwhile, a survey of private-equity industry leaders conducted by consulting firm AlixPartners with research firm CSA Institute and IPEM showed that nearly half, or 49%, of respondents predicted that there would be a major economic correction this year, with 69% saying they expect valuations in their target markets to decline this year.

“The survey told us that, actually, [while] there was lots of optimism that high valuations would persist last year, this year is the year when valuations will start to decrease,” said Catherine Sherwin, a managing director at AlixPartners.

However, some conference speakers said they expect the reset to be more muted in Europe’s private markets, particularly in venture-backed technology companies. Ludovic Subran, chief economist at German financial giant Allianz SE, said U.S. technology companies, for example, have burned through cash at a higher rate than their European counterparts.

“The pressure, because of valuation differences between the U.S. and Europe, has been different,” Mr. Subran said, adding, “What you see in the U.S. is certainly coming to Europe, but I would say in [a] more muted way.”

This story has been published from a wire agency feed without modifications to the text.