April 9, 2020

COVID-19’s Effect on the Valuation of Private Equity Portfolio Investments

By Taylor Rosanova, Senior Manager, Advisory Services & Daniel Roche, National Business Valuation Service Line Leader

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The COVID-19 pandemic has resulted in significant volatility and considerable reductions in business values. In fact, the world stock markets at one point were down over 30% from their February highs. For many industries, the situation is worse than that, as those deemed to be “non-essential” during the COVID-19 lockdowns were forced to shut down overnight. For these businesses, the hope is to be able to reopen once pandemic concerns ease.

In the private equity space, firms analyze their investments in private portfolio companies at regular intervals, and the value of these portfolio companies are “marked to market.” However, with the impact of the COVID-19 pandemic on the stock markets, we expect a lot of private equity firms to be revisiting their investment marks at the end of the first quarter and at the end of the second quarter. The valuations of companies observed in the public stock markets generally affect the valuations of privately held investments.

The expectation in most industries is for the contraction of multiples in the short term. This means that while market prices of publicly traded stocks are down, their earnings or revenues may not yet reflect the effects of the COVID-19 pandemic. This will result in temporarily lower multiples that may not fully reflect the true multiples related to the current economics of these companies. Applied blindly, these lower multiples will lower the value of a private equity firm’s investments.

Following this thought is that as companies report their revenues and earnings in the future at presumed lower levels, the valuation multiples may actually increase as stock prices rebound from pandemic levels while earnings are still low. This situation occurred during the Great Recession, when the S&P 500 reached its all-time high multiple of 123 times trailing twelve-month earnings. Private equity firms will have a difficult choice to make in how they utilize these multiples or how they glean meaning from them.

Another issue at hand is that the COVID-19 pandemic is affecting industries differently and firms within industries differently. For example, in the retail space, we see traditional retailers like Macy’s and Nordstrom struggling through the pandemic; however, retailers of essentials such as Amazon and Costco have not been impacted as hard. Valuation analysts, in general, will have to peel back the layers related to these market multiples both on a global scale and within industries in order to find meaningful data to help private equity firms mark their investments to market.

As the first quarter closed last week for many firms, we expect there to be difficult decisions ahead for private equity firms about where they’re going to mark the valuations of their portfolio companies.

If you have any questions, contact:
Taylor Rosanova, Senior Manager, Advisory Services, at 215.297.2322 or email Taylor
Daniel Roche, National Business Valuation Service Line Leader, at 212.485.5708 or email Daniel

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