Private Equity sponsored companies are often valued against their public equity market peers. But do valuations also move in tandem when markets turn down.
Do Illiquid Investors Feel The Down Market
In an environment of "no more easy money", rising rates, cost-push inflation, and a breakdown in just-in-time supply chains, public equity valuations have readjusted sharply. But are investors in the illiquid world of Private Equity feeling the same pain?
With rising rates mechanically reducing todays value of future expected cashflows, both private equity and venture capital fuelled firms are no longer immune from the potential of a future down round. An argument that is supported by public companies that are rumoured to be considering shifting to take-private mode.
The question on investors minds is whether public market multiples are a good proxy for private markets? If they are, private market portfolios will also start to feel the same pain, as the next official fund NAV is released.
Or are valuations dependent on company specific factors such as stage of development. Fast growing disruptive start-ups may warrant a valuation premium.
And beyond discounted cashflows and industry comparables, will valuations be given indirect support from other deals that are struck today at above public market multiples?
This last question will depend on supply and demand dynamics. There may be ample dry powder available from the COVID fundraising period, that needs to be invested and returned to investors with a target IRR. But how attractive is it for new companies to seek funding given multiples in public markets? How much capital is being taken today?
The answers to all these questions are what potential investors are asking.
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