Funds investing in private assets such as infrastructure, private equity and venture capital can be tricky to value.
Many investors focus on the methodology: whether assets are internally valued, use market reference points or are held at cost. But they should also keep an eye on how valuations change over time, and how market moves affect them.
Sometimes a huge discount simply means that the market does not believe private assets are worth what the accounts claim. But that process can work in both directions.
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The A380 puzzle
Take listed aircraft-leasing funds such as Doric Nimrod Air One (LSE: DNA) and Amedeo Air Four (LSE: AA4). Their main investments were in giant Airbus A380 planes, which Airbus stopped making in 2021. So they own assets that could be worthless, or could still be valuable to some airlines (Emirates, for instance, still seems to love them).
In July, DNA announced it had sold its A380 back to Emirates for about $30m. Cue a big share price increase. Then a few weeks ago, activist investor Elliott Management showed up on the share register of DNA Two and DNA Three. Last week, it bought into AA4, which also owns some other models and leases to Thai Air as well as Emirates.
This looks like a play to get all the planes sold to Emirates at above current net asset value (NAV). But how can you value an asset when the only secondary transaction you can point to involves the largest single owner of the asset trying to negotiate a deal for the rest of its holdings? The NAVs are almost pointless in the absence of real market intelligence.
PE is close to a trough
Private equity (PE) valuations are a bit clearer. Many big players declare their portfolio valuations regularly. Everybody expects valuations to decline, but trust discounts to NAV of 40%-50% imply dramatic haircuts.
So far, this hasn’t been the case. PE managers can generally use numbers from the last funding round to calculate valuations, “albeit with ongoing assessments needed to demonstrate they remain appropriate, meaning these valuations could continue to be used for a year”, says Matt Hose, investment analyst at Jefferies. So valuations may not have bottomed out.
Still, PE funds can point to robust corporate earnings from their portfolios, and there are plenty of deals where valuations are looking fairly steady. I estimate we’ll see a 5%-15% haircut, but the discounts on funds such as Oakley Capital (LSE: OCI), Harbourvest (LSE: HVPE) and Pantheon (LSE: PANR) are probably near trough levels.
VC has further to fall
Valuation questions are most pointed in the world of listed venture capital (VC). To be fair, there are still plenty of private early-stage deals showing uplifts. Synthetic biology company Solugen – held by the Schiehallion Fund (LSE: MNTN) – has just announced an increase in valuation from $1.8bn to $2bn. Space-technology trust Seraphim has also bucked the market: its portfolio NAV rose by 1.9% from July 2021 to 30 June 2022, and valuation increases were mostly in the private business portfolio – 88% of the total value.
However, these look like the exception to the rule. Plenty of other deals are probably overpriced. European VC Molten Ventures (LSE: GROW) put out a trading update suggesting that reported NAV per share is expected to drop by as much as 12% to 830p for the six months ending September, from 937p in March. Yet discounts for listed VC funds are running at 40%-60%, which would suggest investors expect bigger cuts.
The market is right to be cautious. The tech-heavy Nasdaq index is down 30% this year. If public small- and mid-cap tech stocks are suffering such huge markdowns, then early-stage investors should perhaps expect 60%-90%.
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