Valuations rebound in 2023?
January 25, 2023
It’s too early to pop the champagne corks, but the signs are positive…
Having spent much of 2022 concerned that private company valuations were historically overvalued…
…and seeing storm clouds across the economy that justified far lower valuations…
…there are signs of clearer skies emerging later in 2023.
There are certain key factors which could reduce the need to impair valuations.
Should inflation halve as many pundits expect during 2023 will help, whilst the significant corporate layoffs by major technology companies should ease cost of hiring/wage pressures on their smaller rivals.
The start of year boost to the quoted markets will, in the round, also help to reset the baseline for valuations based on comparable quoted companies.
The main obstacle around valuation resets will be the prices both financial and trade investors are willing to pay for equity assets.
Whilst the private equity and venture capital markets are still purportedly full of dry powder, the hit to valuations of existing portfolio companies will mean investors will think hard about not overpaying and arguably bargain-hunting in any new deal they are contemplating.
They will be thinking about the overall IRR’s their funds could return, not just individual opportunities.
Trade buyers will be on the hunt for bargains that both increase market share and are earnings enhancing. So they won’t be overpaying anytime soon for the former, if the latter could be an issue.
Current trading conditions are still a fundamental concern.
Will we bump around 0% growth but avoid a recession?
I’m hopeful that our valiant business owners will not accept that position and fight to grow.
However, the pundits seem to be less optimistic than me.
There are a lot of heavily indebted companies out there who will struggle with profitability and even cashflow as the net tightens around interest rates.
With both businesses and consumers feeling the pinch, sales may not be so readily available or deals may have to be cut at lower margins.
The looming increase in Corporation Tax will also hurt valuations of UK private companies.
The first three months of the year will definitely be a good time for people interested in companies whose valuations are more muted, as the negatives still outweigh the positives. I saw a report that “peak down round” in the VC market will be later this year.
Of course, once peak down round has been achieved, the only way will be up. The challenge for us all is, just like the top of the bubble, the bottom will be hard to call.
