Private Equity Valuation Considerations in the COVID-19 Environment
July 29, 2020
By Jennifer Cuello
Private equity and venture capital firms have faced a series of valuation challenges during the COVID-19 pandemic. Anthony Minnefor, Partner in EisnerAmper’s Financial Services Group, and Craig Ter Boss, Principal in EisnerAmper’s Corporate Finance Group, discussed these challenges in a recent podcast: “Private Equity Valuation Considerations in the COVID-19 Environment.” Among the topics the pair discussed:
Changes in Valuation as a Result of COVID-19
For valuations that were being completed in the first few months of 2020, most private equity firms were using a weighted approach between the guideline company method, using market multiples, and a discounted cash flow method, utilizing the projected performance of the subject company. When preparing valuations using the guideline company method, there is a timing disconnect between market cap data, which is as of the valuation date, and earnings data, which is usually from the prior month or prior quarter. During periods of market stability, this timing difference is generally not an issue.
As the COVID-19 pandemic became an increasing concern in early 2020, timing differences started to become problematic when determining multiples of guideline companies. Through March 31, 2020, market caps had decreased 30%-40% due to the uncertainty created by COVID-19, but the earnings being used to derive multiples were from an earlier, pre-COVID 19 period. As a result, multiples in many industries declined consistent with the decline in market caps, as the impact of COVID-19 was not reflected in the earnings used to determine the multiples. Due to this disconnect, many firms opted to reduce or eliminate the weighting of the market approach for March 31, 2020, valuations.
Due to the continued timing issues surrounding the use of the guideline company method, there has been an increased focus on the subject companies themselves, their individual exposure to COVID-19, and how it will impact short- and long-term projected performance.
Valuation Considerations That Remain Unchanged
Regardless of market conditions, including those brought about by COVID-19, certain factors remain important to consider when preparing valuations:
- Choose the right comparable companies.
- Evaluate qualitative factors.
- Compare assumptions made at the time of initial investment.
- Firms should have both a robust and flexible valuation process in place, whether during uncertain times, such as those we are facing with COVID-19, or during periods of stable market conditions.
- Continued market dislocation may result in firms giving a higher weighting to the income approach over the market approach. Firms should continue to evaluate the appropriateness of market multiples for guideline companies.
- There is no simple answer when it comes to valuing private equity investments. It is important to evaluate both quantitative and qualitative factors in order to determine an appropriate fair value for a subject company.
To access the complete podcast, please click this link.