Kroll experts share key lessons for private investment valuations

24 January 2025 Consultancy-me.com

At an event hosted by Kroll, experts from across the valuations landscape came together to discuss how the changing geopolitical and political landscape is impacting the domain of private investment valuations.

At the conference, which took place at the Ritz-Carlton in the Dubai International Financial Centre (DIFC), some of the brightest industry minds discussed key trends in the investment landscape, and how these are impacting the valuation of private investments.

Acknowledging that the current environment of volatility provides a highly challenging backdrop for valuations, the panel of experts underscored the importance of strategic insights and robust valuation policies in maintaining investor confidence.

Based on the discussions at the event, four leaders from Kroll – Hakim Abdeljaouad, Srividya Gopal, Ross Hostetter and Ryan McNelley – outline the six main takeaways and lessons learned for industry practitioners:

Consider a full-scale discounted cash flow analysis

Hakim Abdeljaouad, Managing Director and Head of Valuation Advisory Services for the Middle East: “The impact of interest rates on private equity and private credit varies for each business. For borrowers, rising interest rates increase costs, reducing available capital for reinvestment or distribution. This dynamic affects overall business performance and can also influence customers facing higher costs, impacting capital costs and valuation discount rates.”

“To assess a business’s financial health comprehensively, a full-scale discounted cash flow analysis is recommended, as it projects future cash flows and provides insights into valuation.”

Return to fundamental valuation principles

Srividya Gopal, Managing Director and Southeast Asia Leader: “Over the past several years, the markets have been nothing but volatile. The traditional economic cycles are seen very differently in today’s world. In times of uncertainty, such as during economic downturns or global crises, it is crucial to return to fundamental valuation principles.”

“A valuation should not be viewed as a fire sale; instead, it’s essential to evaluate how market participants perceive specific situations based on known and knowable factors as of the valuation date. Key considerations would include investee company operational and performance impacts, comparable company valuation impacts, applying appropriate valuation techniques, and understanding the impact of risk.”

Monitor market movement closely

Ross Hostetter, Managing Director and Global Alternative Asset Advisory Leader: “In complex times, it’s crucial to closely monitor market multiples, as they reflect the level of risk associated with private investments. For instance, during the tech boom of 2020-2021, multiples soared to unprecedented levels. However, when the market corrected these valuations adjusted significantly downward.”

“Regularly assessing market transactions and multiples can provide real-time insights into how businesses are valued, allowing investors to make informed decisions based on current market conditions and inherent risks. Stay vigilant and adapt your valuation strategies accordingly.”

Demonstrate implementation of valuation policy

Ryan McNelley, Managing Director and EMEA Portfolio Valuation Leader: “Limited partners (LPs) expect general partners (GPs) not only to have a robust valuation policy in place but also to demonstrate its effective implementation. This includes having the necessary people, resources and training to carry out the policy’s guidelines.”

“It is crucial to maintain independence in the valuation process, ensuring that it is not overly influenced by the investment side of the business. When LPs assess the reliability and robustness of the valuation they see, they look for evidence of these factors being addressed. In addition, valuation remains important even in closed-end funds, as LPs constantly re-evaluate their asset allocations based on the net asset value provided.”

“Valuation policy can be a simple document; it need not be too elaborate and should not be prescriptive or rule based. At minimum, it should mention the standards, guidelines or best practices that will be followed; provide clarity on roles and responsibilities for valuation decisions; reference any escalation process and frequency of valuation/reviews; and explain how independence will be maintained in the valuation process.”

Maintain credibility in valuation

McNelley: “When discussing valuation, credibility is crucial. Valuation in private markets is essentially a calibration exercise between entry and exit. The first question to consider is whether the initial investment price was fair and at arm’s length.”

“As the investment matures, the valuation should pivot from calibrating back to the entry price to calibrating forward to the exit price, ensuring that the final valuation before selling the asset is credible relative to the actual sale price. Investors may ask more questions about valuation during fundraising, but it’s essential to remember that any claims made in valuation will come to light once the asset is sold.”

Emphasise governance and compliance

Abdeljaouad: “Today, most accounting rules require fair valuations. However, the practical application of fair valuation has taken much more time than the mandatory implementation.

“While accounting standards are at a high level and don’t necessarily mention specific methodologies, additional guidance is available through International Private Equity and Venture Capital Valuation Guidelines, International Valuation Standards, and other sources, such as the American Institute of Certified Public Accountants PE/VC Guide.”

As private equity continues to attract significant capital flows, it’s crucial for managers to prioritize governance and compliance. With the increasing amount of money pouring into the space, it’s essential to ensure that your firm is well positioned to participate in this capital flow by adhering to strong governance and compliance practices. This not only helps maintain the integrity of your firm but also enhances your credibility with investors and regulators.”

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