- Listed private equity sector faces a challenging period
- Many valuations are based on stale prior funding rounds
- Even if markets stabilise, valuations may not have bottomed out
The outlook for the listed private equity sector looks increasingly challenging, according to recent research from broker Jefferies.
US buyout firms Apollo and KKR announced second-quarter private equity portfolio valuations which were 4.9% and 7% lower respectively on the previous quarter.
Rivals Ares, Blackstone, and Carlyle recently reported private equity portfolio valuations which were up 1.5%, down 6.7%, and flat for the quarter respectively.
Broker Jefferies believes second quarter private equity 'marks' will highlight weakness in both buyout and venture/growth investments.
Furthermore, even if markets stabilise, there may still be a drag on net asset values for several quarters if valuations are based on now stale prior funding rounds.
MATERIAL DE-RATING
Analysts point out the second quarter saw a material decline in the benchmarks used to assess the direction of private equity buyout valuations, with the Russell 2000 Value Index down 16% while the Stoxx Europe 600 Index was down 11%, both in local currency terms.
For venture/growth equity exposure, the tech-heavy Nasdaq 100 Index fell 22% while the Refinitiv Venture Capital Index collapsed by 37%.
In terms of valuation multiple, the MSCI Europe Software and Services Index de-rated to from more than 22.5 times EV/EBITDA (enterprise value to earnings before interest tax, depreciation and amortisation) to 19.6 times.
DOWNSIDE RISK
According to Jefferies, the extent of the market declines and the valuation multiple contraction during the second quarter will be difficult for private equity funds to avoid.
Consultancy firm Bain published its mid-year 2022 private equity report alluding to buyers and sellers of private companies having increasing trouble aligning on price, indicating that valuation multiples are set to fall during the second quarter.
VENTURE GROWTH
Where funding rounds are taking place, Jefferies says it sees evidence of a number of high-profile 'down rounds', most notably Klarna whose valuation fell 85% from $46bn in its previous funding round.
Movements in relevant indices still signal broad weakness in growth equity and venture capital marks although, albeit unlike with buyouts, the full impact may take time to feed through.
Jefferies points out that while the International Private Equity and Valuation guidelines permit the use of last funding rounds for carrying valuations, ongoing assessments are needed to demonstrate they remain appropriate,
This means these (arguably stale) valuations could continue to be used for 9-12 months.
As a result even if markets stabilise from here, it may take several quarters for venture and growth valuations to bottom-out.
