Valuation Geek Heaven!

February 21, 2023

We’ve noticed an exciting new trend emerging…

You see, the big conversation we’re having with many investors is over the question of what private company assets are really worth in the new economic environment.

One person summed it up well like this:

“Everyone is going to have to get used to there being more volatility in private company investments.”  

Thankfully, because it’s now possible to understand and compute a ‘live’ valuation within a few days, if not sooner, a new paradigm really is emerging.

Indeed we are seeing initial valuations conversations quickly develop into significantly more intensive debates around valuation methodologies and assumptions.

For valuation geeks like us this is manna from heaven!

Where a valuation is needed to settle a dispute (divorce, commercial litigation etc) we now see the increasing importance of agreeing the valuation parameters up front, so both sides can negotiate to settlement as soon as the report is ready.

Private company valuations are also entering similar airspace because of the emerging understanding of the level of exposure many investment trusts have to private assets.

And with hindsight we can now see that the debacle of Woodford was actually the precursor to the concerns about Scottish Mortgage and even RIT.

So what’s happening in the UK market right now? 

Essentially the sell-off in quoted stocks has led to investment trusts finding the % of private equity assets vs quoted has shifted significantly in favour of the former.  And that of course begs the question whether the those private equity assets are correctly priced given that there is no liquid market.

The wide variety of valuations we are doing is giving us a really interesting perspective on the issue.

One theme that is particularly curious is how valuations today are comparing with valuations for last funding rounds undertaken pre-Covid 19 (i.e. up to Feb 2020).

More data would always be useful, but whilst the down round thematic is definitely present, it is definitely not the case that it is as always severe as might be feared.

Perhaps unsurprisingly, we are finding that the story for companies that have traded strongly over the last two years is definitely less painful than those who have shown less progress.

We do think that valuations today of companies where investments were made in the bubble of Mar 2020 to end of 2021 (or even into early 2022) may tell a different story.

As soon as we get some insights I will let you know.