MSCI Research: Private Equity Firms Face a Valuation Reckoning

April 10, 2020 | Latest News, News, Private Equity

Private equity funds could face a huge hit to valuations as of the end of the third quarter, according to MSCI Research.

Using their private equity valuation model, they determined some private equity funds could take a Q1 write-down of portfolio companies by as much as 35%.

Investors who recently compiled their year-end valuations may have a false sense of security right now. Many could be shocked in a few months when they realize the devastation of the first quarter.

MSCI Research on Valuations

If the economic shutdown lasts longer than initial projections, private equity-owned firms could face drastic challenges.

A decline in revenues and a lot of debt presents a vicious combination that could fuel portfolio bankruptcies across the PE industry.

A look at the largest holding of publicly-traded equities held by private equity forms gives some idea of the extent of the damage. The top public holdings of private equity firms are often portfolio companies where an initial IPO has been done to sell some of the stock to the public.

The private equity firm usually retains a controlling stake with the intention of doing another secondary offering at higher prices to complete the exit.

  • KKR (NYSE:KKR) has a fantastic long-term track record as an owner of public equities, but this year has not been kind. Their top positions are down 37% as a group so far in 2020.
  • Apollo Global Management (NYSE:APO)has seen its top 20 public equity positions decline by 41% so far this year as well.
  • Carlyle Group (NYSE:CG)has seen its public equity portfolio demolished so far as well, with a decline of 56% in its most significant positions.
  • Blackstone (NYSE:BX) has fared the best among the four largest publicly traded private equity firms with a drop pf 32% year to date.

Private equity managers have been among the best investors on the planet for decades now, but the pandemic hit to the economy has the market reeling. The public equity and portfolio companies should recover quickly if we get an end to the nationwide shutdown in a reasonable time, but a long term continuance of current conditions could be a massive problem for private equity funds and their investors

Recent: Venture Capital: PE and VC Firms Turn to Asia for Deals

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