Responding to market volatility and valuation uncertainty

Private equity valuation survey

With the majority of respondents having taken a value hit in Q1 valuations, a PwC survey of private equity (PE) firms reveals that more than 80% anticipate either a flattening or much more modest falls in their Q2 results.

Is this more optimistic Q2 outlook justified? Both PE firms’ decision to bear the bulk of the valuation pain early and the recent rally in public markets would point to a softer landing in Q2. However, we expect significant volatility and uncertainty to continue through into the latter half of the year, if not beyond, and building a robust valuation process to assess and reflect this uncertainty is therefore key.

Our survey asked whether (and how) respondents are reacting to this economic uncertainty and market volatility by adapting their approaches to valuation. Without at least some adjustment and augmentation of valuation techniques, the big question for you as a PE firm is whether your results will stand up to intensifying investor, regulator and auditor scrutiny?

How then can you strengthen the credibility of your valuations?

Target the riskiest elements

Distinguish areas of your portfolio that are relatively stable from the elements that are most subject to risk and stakeholder scrutiny. Further analysis and substantiation of the high risk areas would focus on factors such as liquidity, operational resilience and the continued viability of the business model.

Ongoing uncertainty should be reflected in the valuation approach

Increased volatility, particularly of the scale seen in the last 2 quarters, naturally results in significantly increased uncertainty. As a result, firms need to consider a combination of valuation methodology options to properly address this in their valuations, and ensure they are fit for the current environment. A combined, multi-faceted approach should avoid over-reliance on single data points, allow for adjustments where appropriate, consider uncertainty without double counting risk, and incorporate robust documentation and strong governance.

Deals led recovery

Business restructuring and divestment are set to bring a wave of acquisition targets onto the market. In addition to opportunistic short-term openings, there are opportunities for longer term strategic turnaround and deal value optimisation.

PE firms are now increasingly willing to invest in businesses with a long-term strategic growth plan, allowing the companies to pursue their strategy free from the short-term pressures of more activist shareholder investment. The impact of the COVID-19 crisis could accelerate this trend and the resulting strategic deal openings.

Of course, any shift in long term business model and strategy for exit could have an impact on value today. As strategies develop, business models may change. Over time, as these new business models are proven, this should be built into valuations.

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Albertha Charles

Albertha Charles

Financial Services Partner, PwC United Kingdom

Tel: +44 (0)7803 234274

Katrina Hallpike

Katrina Hallpike

Financial Services Valuation, PwC United Kingdom

Tel: +44 (0)7715 035153