Dr. Daniel Schmidt, Founder & CEO, CEPRES
(November 29, 2022) Over the past four years, private market investors have confronted three significant macro shock events — the COVID-19 pandemic, the war in Ukraine and 40-year inflation highs. As the market faces intersecting headwinds of geopolitical instability, inflation and volatility, CEPRES evaluated how asset owners are managing their holdings.
Based on CEPRES’s proprietary deal-level data on 108,000 PE-backed assets across more than 11,000 funds, representing $44.5 trillion in asset value, CEPRES found two key trends — decelerating exits and valuation fluctuation.
Fig 1. Cash exits Q1 2021 – Q3 2022
The decline in total exits over the 18 months suggests that asset owners are holding assets and waiting for more favorable exit conditions. Based on proprietary CEPRES data and conversations with some of the thousands of asset owners who contribute data to CEPRES, we expect up to a 50% decline in cash exits in Q4 2022.
Fig 2. Enterprise value markup and markdowns by asset owners — quarter to quarter Q3 2019 – Q2 – 2022
At the start of the COVID-19 pandemic in 2020, we saw asset owners aggressively mark down holdings. As worries began to abet and the recovery ensued, we saw asset owners aggressively mark up assets in 2021. This valuation markup aligned with significant public market growth — the S&P 500 gained 26.9%, and the Nasdaq gained 21.4% in 2021. With the war in Ukraine, inflation, supply chain issues, a potential recession and other headwinds, we see markups decelerating and markdowns slightly increasing. However, we expect overall valuations to remain steady through the beginning of 2023.
The illiquidity of the asset class and the lack of daily market-to-market valuations primarily drive this classical effect of stale prices. Valuations measured that can act as transaction comps are only those of active transactions during the downturn. Today, managers are exiting companies that still have sustainable valuations. However, they avoid exiting deals where valuations face pressure and instead shift those into the exit year, hoping for a general market recovery. Therefore, private markets usually react with a year delay on general market valuation movements. If public markets do not recover until Q3 2023, a larger group of managers will have to sell companies for reduced valuations, driving lower general market sentiment.
Asset owners have begun to prepare for a potential recession in 2023. Amid numerous macro shock events, asset owners hold assets longer to better time exits. Yet despite these macro events, we expect valuations to remain steady through the beginning of 2023.
CEPRES Predictive Intelligence is an intelligent AI-based multi-factor portfolio simulation and management solution that incorporates the future developments of single funds based on a unique forecasting technology for illiquid asset classes. CEPRES Predictive Intelligence enables investors and risk managers to measure future uncertainties and optimize asset allocations for any market condition. With just one click, run true Monte Carlo Simulations that create 100,000 scenarios based on more than 107,000 cashflows, P&Ls and operating company metrics from PE-backed companies.
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