Episode 1: Private Market Valuations with Scott Kupor and Andrea Auerbach
Sep 26, 2023
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"Private Market Valuations" is a fascinating podcast featuring Scott Kupor and Andrea Auerbach. They delve into the controversial topic of private market valuations, discussing the relevance of interim valuations, challenges in valuing early-stage venture sites, and potential manipulation in the valuation process. The podcast also highlights the client-first mentality of Franklin Templeton Alternatives and explores the impact of the economic environment on VC funds and portfolio companies. The importance of consistency and transparency in private market valuations is emphasized, along with the need for better communication and standardization in the industry.
Private market valuations can take 12-18 months to align with public market valuations.
GPs tend to be more conservative in marking down valuations and slower to take write-downs, but more willing to acknowledge permanent diminutions.
Transparency and consistency in valuations are crucial for LPs, who expect standardized valuation practices and communication.
Private market valuations may not closely follow public markets due to long-term value focus and different investment horizons.
Deep dives
Private market valuations depend on the stage and hold period
Private market valuations are highly dependent on the stage and hold period of the investments. In general, as investments get closer to the exit date, valuations are expected to more accurately reflect the expected monetization value. However, there can be a lag in valuations, especially for early-stage companies, which may experience more volatility and uncertainty. It typically takes about 12 to 18 months for private market valuations to align with public market valuations. Additionally, GPs tend to be more conservative when taking write-downs, and the speed of marking up valuations can vary. Overall, private market valuations are influenced by various factors and require ongoing assessment and adjustment.
GPs are slower to mark down but faster to mark up valuations
GPs tend to be more cautious when marking down valuations, especially during significant market downturns. They are generally slower to take write-downs but more willing to acknowledge permanent diminutions in value. On the other hand, GPs are less likely to aggressively mark up valuations and are more conservative in this aspect. The timing of valuation adjustments may also depend on audit cycles, with more uniform changes observed following year-end audits. While private market valuations are affected by public market movements, they also incorporate other indicators and factors for more accurate assessments.
Valuation movements take time to align with public markets
Valuation movements in private markets take time to align with public markets. Typically, there is a delay of 12 to 18 months for private market valuations to converge with the long-term glide path of public market valuations. The recent market fluctuations have created some challenges in valuing private market assets, but it is expected that private market valuations will gradually reach a more accurate reflection of their expected fair value as time progresses. The recent public market recovery has influenced private market valuations, but their trajectory may still be affected by other factors. Ongoing assessment and incorporation of various valuation indicators are necessary for accurate valuation adjustments.
LPs face allocation challenges due to public market volatility
Limited partners (LPs) are primarily focused on investing capital to meet the objectives of their missions, organizations, or families. They have specific allocations to different asset classes and may face allocation challenges due to public market volatility. During the early stages of the COVID-19 pandemic, many LPs had to catch up with their target allocations as public market valuations increased. However, when markets shifted in 2022, LPs faced challenges in maintaining their target allocations. This created a bad denominator problem, where the increased public market valuations affected the allocation percentages. LPs need to carefully manage their allocations and ensure compliance with their investment objectives.
Importance of Transparency and Consistency in Valuations
The podcast episode emphasizes the significance of transparency and consistency in valuations. It highlights that while there may be different valuation methodologies and approaches among GPs, it is crucial to maintain consistency and communicate these approaches to LPs. The importance of transparency is emphasized, and it is noted that LPs are generally sophisticated and expect transparency and consistency in valuation practices. The episode also discusses the role of auditors in vetting the valuation process and ensuring transparency. Moreover, it mentions the need for more standardization of valuation standards across the audit community to enhance consistency and reduce variability.
Divergence Between Private and Public Markets
The podcast explores the divergence between private and public markets in terms of valuations. It highlights that private valuations may not necessarily align with public markets due to various factors, including long-term enterprise value considerations, different investment horizons, and the focus on true value creation. The guests argue that private markets allow managers to focus on long-term value and avoid the short-termism present in public markets. It is emphasized that private valuations are not meant to follow public markets closely and that expecting such alignment is based on an assumption of efficient market hypothesis, which is not universally believed. The episode acknowledges that while private valuations may occasionally face criticism, the emphasis should be on providing transparency, consistency, and effective communication to LPs.
Democratization of Private Investments and the Role of LPs
The podcast episode discusses the potential democratization of private investments and the implications for LPs. It emphasizes the need for increased transparency and disclosure as the private investment space approaches retail investors. This transparency is seen as necessary to cater to the demands of a wider investor base and could lead to the standardization of methodologies and valuation practices. The importance of LPs demanding transparency and consistently applying valuation policies is highlighted. Additionally, the episode mentions the role of LPs in pressuring GPs to ensure proper valuation practices and fiduciary responsibility. The guests also discuss the role of auditors and valuation experts in the process, noting that their involvement can help ensure consistency and quality.
Private Markets Valuations…do these quarterly marks properly represent fair value or are they make believe…contrived from the fictional world of GP machinations? Do these interim valuations, as one commentator put it, “not matter;” or as another proclaimed provocatively, are they simply a case of “volatility laundering.” Is the gap or “lag” with public market equivalents relevant…are we anchoring to the right bogey…or arbitrarily comparing objective value to an emotionally manic patient, to paraphrase Warren Buffett? In today’s episode, our inaugural episode of Capital Decanted, we are going to lean in to this divisive and complex topic with some help from Scott and Andrea.
Introduction (0:48)
Halftime (38:02)
Guests (44:05)
Guests:
Scott Kupor, Managing Partner, A16z
Andrea Auerbach, Global Head of Private Capital, Cambridge Associates
