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What’s the impact of COVID-19 on portfolio valuations?

Valuation considerations for private equity, debt and credit, and real estate firms

Many businesses have experienced significant declines in market capitalisation as a result of the unprecedented impact of and market reaction to COVID-19. How will this affect financial reporting for both March 31 quarter-end and beyond? We provide valuation considerations for portfolio companies to be aware of when valuing a fund’s investment holdings.

Potential impacts of COVID-19 on portfolio valuations

Many businesses have experienced significant declines in market capitalisation as a result of the unprecedented impact of and market reaction to COVID-19. Some of these impacts may be tied to temporary factors and extreme volatility in the markets, while others reflect longer-lasting or even permanent shifts in the business or industries in which these companies operate.

This will affect financial reporting for both March 31 quarter-end and beyond. The impact of COVID-19 also raises a number of valuation considerations to be aware of when valuing a fund’s investment holdings.

Valuation considerations for private equity, debt and credit, and real estate

Market data discrepancies

Consideration should also be given to the following items:

  • As comparable company metrics are on a lagging basis, market multiples will be depressed relative to historic multiples, as the denominator (BEV or equity) has declined significantly while the metrics don’t accurately reflect the impact of COVID-19 on the underlying business financials.
  • Revised analyst estimates for the public companies may also not be formalised, which will have a similar impact on the use of forward-looking multiples. It’s important to consider this when selecting the appropriate multiple to apply to a portfolio company’s metrics, particularly if those metrics have already been adjusted downward.
  • Care should be given to ensuring the public companies and the portfolio company is being compared on an apples-to-apples basis.
  • Discount rates built up using historical data may not reflect the current environment or outlook for the business going forward.

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Portfolio company considerations

  • Is the business providing updated financial data?
  • Does the downturn trigger potential goodwill impairment for the portfolio company?
  • How does the investment manager’s outlook for the business compare with company management’s assessment of the situation?

Other considerations related to the impact of COVID-19 on portfolio valuations

  • Reforecasting and modelling. Given the immense uncertainty in the near and medium term, consider alternative scenarios in your forecasting process and performing enhanced modelling.
  • Cash management. Evaluate whether the portfolio companies have the cash to cover operations and obligations under alternative scenarios and stay connected with your lenders.
  • Normalisation of market data. Given the disconnect in market data ('unaffected' metrics vs. 'affected' market prices), it’s important to document the nature of the selected multiples (actual vs. normalised) and how they align against the portfolio company’s financial metrics. While there’s no preferred method, care should be made to ensure that the comparison is apples-to-apples between the public comps and the portfolio company.

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