Valuation of the family office investment portfolio – harder to value assets just got harder to value | Deloitte UK has been saved
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In the current uncertain environment, family offices are challenged to consider the impact COVID-19 has had on the value of their unlisted investments. No one can say with certainty what the course of the pandemic will be, much less its impact on businesses in the long or even medium-term. The uncertainty poses significant challenges. What might the landscape look like once the pandemic passes? What if the pandemic lasts longer than we are expecting? While the answers are not available, a well-considered approach to assessing the impact is required.
The investment governance frameworks of family offices would likely not have accounted for such a unique and unprecedented disruptive event. As such, a thorough, swift and robust re-assessment of the frameworks may be needed by management as they continue to respond to the crisis. Additionally, any framework that included the use of third-party valuers may need to amend its reporting requirements to reflect updated terms and conditions with their vendors as the need to incorporate and reflect COVID-19 considerations and its inherent uncertainties become pivotal to all stakeholders.
As the market compression continues to change the inherent nature of the underlying assets within the investment portfolio – previously liquid investments become less liquid due to the decreased trading activity – management will need to consider the adequacy of its current investment governance framework to respond to an intrinsically more risky portfolio than the targeted portfolio envisaged from its strategic asset allocation framework.
When attempting to determine fair value in these uncertain times we should consider the increasingly broad effects on the financial condition of portfolio companies as a result of the pandemic’s impact on the country, industry, and major financial markets. It is also important to be aware that such conditions can change significantly over relatively short periods.
Valuation in uncertain times - Is there guidance?
International Private Equity & Venture Capital (IPEV) Valuation Guidelines were updated on 31 March 2020 and provide useful considerations when valuing your portfolio, some of which are detailed below.
As the impact of the pandemic unfolds, a holistic assessment of every investment in a portfolio is critical. This should extend to the portfolio company’s revenue, customers, supply chain, and operations to determine the extent of any operational disruption.
Understanding the extent of operational disruption because of COVID-19 will be a key driver in adjusting any performance metrics and factoring in market participant’s considerations.
The below factors are important in assessing the threat of COVID-19 and thus should drive any forecasts used as part of the valuation of portfolio companies:
There is a possibility that profitable investments may exist under this unique market climate. For example, investors looking at primary investments could benefit from lower entry multiples and diminished competition, while favourable secondary investments could arise as economic turbulence caused by COVID-19 create buying opportunities. Finally, the impact of COVID-19 may create long-lasting behavioural changes to consumer habits which result in the strengthening of well-positioned companies or companies which have successfully managed to adapt to the new economic environment.
The last few months have been challenging, and so too will be the coming months, the decisions businesses make in the near term will most likely drive sustainability in the long term and that includes how it communicates with its stakeholders. It is too soon to tell how we will emerge, but resilient leaders are preparing now for what the future may hold and reporting responsibly to their stakeholders.
Barry is a Partner within Deloitte’s Investment Management and Private Equity practice with over eleven years of industry experience focusing on Alternative Asset Managers. Barry leads our Private Equity assurance offerings. He and his team help firms and their funds navigate complex accounting, enhance their governance and controls and assist with regulatory change.
Ceile is a Director in Investment Management and Private Equity audit practice at Deloitte In London. She has over 10 years’ experience of leading audits and is significantly experienced in technical accounting under IFRS and UK GAAP. Ceile has a deep understanding of the complexities of the Private Equity, a proven track record of delivering high quality audits and managing risk.