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Valuation Write-Down Considerations

Dec 7, 2023
Jennifer Cuello
Vasili Markos

In any environment, it is critical that fund managers consider when valuation write-downs might be necessary for investments in their portfolios.  Entering Q4 2023, the path to exit for the private markets remains particularly challenging and could have an impact on how managers view the value of their portfolio companies.

There are challenges in all key means to exit; strategic and corporate acquirers and initial private offerings (“IPOs”) alike.  According to Pitchbook, the value of private equity exits fell over 40% in Q3 from the prior quarter, with total exit value tallying lower than any quarter since 2008 (with the exception of Q2 2020).  On the IPO front, Arm Holdings, Instacart and Birkenstock IPOs all dropped below their IPO prices in the days that followed their debuts, which didn’t provide the confidence investors were looking for to indicate a rebound of the IPO market. 1

Interestingly, median deal values have seen a rise, indicating that the market is willing to pay a premium for perceived higher quality investments.  

While valuations can be impacted holistically based on these factors, fund managers should consider any company’s industry and specific facts and circumstances, including:

Recent Rounds of Financing at the Company Itself 

Fund managers should consider the relevance of the most recent round to the current valuation date and what has occurred both at the company and within their industry since the last round.  If there has been a down round with outside investors, it is generally an indicator that the valuation of the company should decline -- but fund managers should also consider their liquidation preferences to determine if their interest would decline in kind.  

Performance of Public Market Comparables and Evaluation of Public Market Transactions  

If the fund used a designated comp set during diligence to support the appropriate multiple, how has that comp set performed since purchase?  What types of public market transactions have occurred that might inform the value?  For stale financings where there are strong correlations with public market comparables and those companies and/or transactions are seeing a decline in multiples, fund managers should consider whether the valuation of their company should decline.  There is no perfect answer to the number of months where a financing would be considered “stale,” particularly in the current environment, so this will have to be assessed on a company-by-company basis.  

Stage of the Company  

Early-stage companies that are pre-revenue may have a more challenging time evaluating how market factors and indicators impact their current company.  Qualitative factors such as milestones since buy-in (building out leadership teams, getting product to launch, etc.), cash runway, and pending interest may provide further information on how to value.  With average time between rounds increasing, the ability of a company to conserve cash is an important factor, and companies with limited runway may need to be evaluated for impairment.  

Particularly with companies that are deemed difficult to value, fund managers should consider whether valuations should be done in-house or outsourced through a third-party valuation firm.

The key takeaway is that there no one-size-fits-all approach.  Fund managers will have to determine if a write-down is necessary or not upon review and consideration of the current year data and performance of each portfolio company while also considering and navigating current challenges in the private fund exit market.  

1PE exit value loses ground after short-lived recovery | PitchBook

Our Current Issue: Q4 2023

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Jennifer Cuello

Jennifer Cuello is an Audit Partner in the Financial Services Group providing audit and accounting services to clients in the insurance, private equity and venture capital industries.

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