Mark to market and unlisted valuations
We’ve often talked about the difference between unlisted and mark-to-market valuations. Below is a chart from the private equity manager HarbourVest comparing the share price of their evergreen listed fund to the net asset value. (An evergreen like a listed investment company – a closed end fund that trades on the stock market.) The share price is the yellow line, the internal valuation is the blue bars. The fund has over 1000 different investments and a total value of over $3B US.
It’s apparent that the fund has always been at a discount to NAV. The discount is in parentheses at the bottom of the chart. It’s usually been about 20%, and has recently increased to 50%.
A positive way to look at this is that the 20% discount is the illiquidity premium at work: you can buy assets at 20% below what they’re worth! On the other hand, it’s perfectly normal for listed equity managers to say that the companies are trading a discount to intrinsic value too. I’ve lost count of the number of times I’ve heard an equity manager say something like, “Our portfolio consists of high quality companies, and we don’t invest unless there our conservative valuation models indicate at least a 20% upside.” Yet a casual glance at the returns of these managers shows that they don’t achieve anything like the returns their valuation models indicate they should. Our conclusion is that valuation models are almost always overoptimistic.
The chart above suggests that the recent fall in listed valuations is overdone, but it also shows how much quicker the fund’s valuers were to mark up valuations in during the period of lower interest rates and economic stimulus after COVID than to mark down valuations due to higher interest rates and the threat of recession.
A recent survey of institutional investors (see here) found that most CIOs of large funds are expecting private asset valuations to continue to fall, and are holding back on allocating more capital to the asset class. That would partially explain why we’re seeing so many private asset firms come to market in Australia at the moment with new products – they’re not getting the flows from insto funds and are looking for other sources of capital to fill their pipelines.
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Please note that past performance is not a reliable indicator of future performance.
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