What will make valuations change in 2024?

January 9, 2024

Catching up on the reading I missed over the holidays, I came across this interesting article in the FT The great speculative era on markets is hard to kill (ft.com).

It is written by Philip Coggan a financial journalist and author of ‘More: The 10,000-Year Rise of the World Economy’ (which I must put on my reading list).

In it Philip Coggan touches on some major themes around investment which should impact on asset prices and where there are oddities. There is information asymmetry which may explain some of what we have been seeing in variance in asset values compared with what the person on the street might think. In summary, in the US especially he says that investors still have an appetite for a “little gamble” and this might explain why speculation in various asset classes is leading to prices holding up.

He moots that changes in regulation (you will all know about the plans for regulation in AI but that is only one area where governments are focusing) could end speculation. He also thinks that a tightening of credit conditions, especially in and around appetite to support tech businesses could cause the equity investment market to seize up.

In this scenario, speculators will simply switch to another high risk asset class (further hyping cryptocurrencies perhaps?).  Another major war or a central bank miscalculation in monetary policy are other issues that can readily be spotted.

What does this mean for private company valuations in 2024? Whilst history informs current thinking, it is always dangerous to rely on it for direct precedents on future trends. With 2024 being a UK election year, we can expect some headline goodies from the Government and generous promises from the opposition. If I was going to make a prediction I would guess these will be aimed at voters rather than businesses.

In the Autumn Statement the full expensing giveaway was really targeted at very large businesses as it was already possible to fully expense up to £1m of capital expenditure and the NI reduction will benefit employees but will give no cash advantage to their employers.

For companies in areas which benefit from consumer spending, the NI giveaway and any further reduction in employee taxes such as income tax, valuations should improve. Companies selling elsewhere will probably see little change in terms of macro-economic impact.

Whether the government and its regulatory bodies manage to enact regulatory change before the election remains to be seen. (We are still waiting to hear if the FCA is going to announce a consultation on the quality of private company and other private asset valuations by the way). New regulatory impact is probably not going to be a major reason to adjust value, though never say never.

When it comes to inflation and interest rates we are not anticipating any shocks, but of course when they do come they are often a surprise. However, with inflation so much lower, there is a reduced need to impair because company forecasts are not taking inflation into account.

Access to capital is the big issue we are thinking about. For companies that do not need capital the concerns are low. For companies minded and ready to sell, there may be issues if the private equity market remains tight. For those companies needing capital to grow or survive, we currently anticipate that it will be hard to negotiate funding rounds at gangbusting valuations. (We had hoped that peak down round would have come and gone by now, but sadly not). So it will be this segment of the valuations market where we will be making sure that we have the right and most up to date evidence on comparable transactions before we can conclude what the right valuation should be.

We continue to hope that the world does come to see the value in quoted UK businesses in particular, with a general re-rating of stocks listed on the London Stock Exchange, especially if that re-rating is based on a view that the LSE does not HAVE to be a yield market but offers growth opportunities too.

That would boost private company valuations which rely on quoted company methodologies.

The new year is very young and always in business there is everything to play for.

We certainly expect that the outlook for private companies in many sectors of the UK will be better than many fear and that valuations will reflect this.

We are always available to answer queries around valuations and to undertake valuations work. Just call me on 07736676212 or email modwenna.rees-mogg@athlacapitalmanagement.com.