The banking crisis and company valuations

But what does it all mean for valuing private companies?

The obvious one is that cash reserves may not be quite as secure as in the past. A closer examination of this issue is now needed for the assessment of equity vs enterprise value.

For companies with large cash balances, we will have to see evidence on competent treasury management for a team to score highly.

As an aside, it probably won’t come as a surprise that one of the most important signs of a “great team” is evidence of a strong grasp of the numbers. For a start-up this might be well thought through financial models; for a more mature business, we would be looking for a strong suitably qualified Finance Director.

The wider SVB story does not end with HSBC’s remarkable role as saviour.  

Even though SVB added £1.5bn of net assets to the bank, the stock market’s reaction to the news was to mark HSBC’s shares such that the company lost £5bn of value and its share price has continued to drift further downwards over the course of last week as wider uncertainty about banks generally has spooked investors.

Indeed all the UK indices remain volatile.

When we are valuing companies in the FinTech space this cannot be ignored.

The experts tell me that the inverted US Treasuries yield curve is at its most extreme for years. When it has reached this level in the past it was always a precursor to a major recession.

Despite the high hopes of many, wage rise pressure has not gone away and therefore inflation may not fall fast as everyone might have hoped at the beginning of the year.

Historical analysis tends to show that it takes years for inflation to fall back, even from 5% to 2% so we may be seeing more interest rate rises before falls during the course of 2023. As valuers we will be looking closely at loan terms to check whether they are on fixed or variable rates.

For companies with cash we will be keeping an eye out for a positive interest line in the P&L and cashflows as they benefit from any such rises.

Generally the economic outlook is a matter for concern. While exciting fast growing or even potential unicorn businesses, should outride any economic storms, others may find it more challenging.

Of course it’s important not to paint every company with the same gloomy picture, but for mature businesses operating in sectors that are vulnerable to macro economic conditions, very careful attention must be paid to how any down turn in their sector or target markets.

Will we enter a phase where survival of the fittest becomes a reality as competition intensifies for dwindling customer spending?  Market research on who is winning and losing in a market needs our careful attention.

And a last word on quoted company comparables…  

Finding direct comparisons for private companies in the quoted arena can be hard, and sometimes impossible.

However this chart from CB Insights made me think…

As you can see from this selection the odds are that an IPO price does not necessarily tell the traditional story that many might think: namely that stocks will rise in value over time.

In the technology space, especially, prima facie this assumption should always be challenged. If we are going to use quoted company comparables we need to look at more than just the market cap on the day of valuation and think about the trendline as well.