Can you simply reduce the value of all private companies in the UK? Scottish Mortgage and IPEV say yes.

BVWire–UKIssue #17-1
August 4, 2020

valuation methods & approaches
gordon growth model, international business valuation, cash flow

Investment trust Scottish Mortgage, managed by Baillie Gifford, provided a simple solution in April by cutting the value of private companies in its portfolio to recognise the fact that private-company valuations are not insulated from public markets.

Similarly, on March 31, the International Private Equity and Venture Capital Valuation Guidelines (IPEV) were updated with Special Valuation Guidance from the board in the light of the impact of coronavirus. They wrote:

It may no longer be appropriate for recent transaction prices, especially those from before the expansion of the pandemic, to receive significant, if any, weight in determining fair value.

Greater uncertainty translates into greater risk and increased required rates of return, which generally would indicate that multiples will decrease, even in the absence of recent transaction data.

Investment prices are also being reconsidered. One BVWire—UK reader commented that, ‘in the pre-pandemic private equity market, fair value would typically be determined by competing investors keen to take part in further funding rounds. However, in today’s market, there may be a lack of suitors looking to invest in follow-on funding.… Consequently, there is an urgent need for valuations of private companies to be reconsidered, both at the fund level and on an individual basis.’

In these circumstances, there has never been a more urgent need for an independent business valuation, whether for an investment committee, a family business, or a board of directors. This third-party assessment provides an additional layer of due diligence that counteracts market fragility and the lack of dependable market comparables.

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