PE firms prep for a 25% reduction in Q1 valuations

A new survey on how COVID-19 is affecting PE sponsor portfolio investments found that 80% of PE sponsors believe that there could be up to a 25% reduction in the value of portfolio investments in their first quarter valuations.

Compiled by private equity fund administrator Gen II Fund Services, the survey shows there is still a high degree of uncertainty around the long-term effects of the disease on investments and, as a result, traditional methodologies for valuing portfolio investments are less reliable.

In the first quarter, firms are considering a combination of approaches, including public company comparables, third party valuation services and adjustments to previously applied valuation methodology.

Gen II surveyed over 150 of its clients from April 8 through April 24. Respondents are principally invested in buy-out, real estate, energy/infrastructure, credit, and fund of funds. The firm administers over $350 billion of private capital on behalf of its clients with offices in New York, San Francisco, Boston, Stamford, Dallas and Luxembourg.

“The survey gives our clients important insights into how PE sponsors are thinking about valuations under these unprecedented circumstances,” said Gen II Co-Founder and Managing Principal, Steven Millner.

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

The survey found a variety of valuation methods at play. Roughly 70% said they plan to hold investments within the last 12 months at cost. A majority (80%) will be primarily relying on public market comparables in conjunction with other metrics for valuation.

And importantly, respondents expect to provide additional capital to up to 25% of their portfolio investments. Most believe (70%) that the effects of COVID-19 will not impact their fund economics. Still most intend to report the effects from the virus on a quarterly basis to their investors.

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