For 2022, private fund CFOs adjust to a new normal in valuations

Private equity and venture capital firms are adjusting to a new normal of post-pandemic market volatility. As increasingly swift moves in market multiples occur to the up or downside, many CFOs and COOs are reflecting on their internal valuation processes in an effort to be more proactive with limited partners.

The past two years have brought perplexing macroeconomic changes, more frequent investor requests, and added complexity in gathering the data needed to produce high-quality valuations. As a result, these and other trends will be top of mind for investors in the year ahead, as valuations are monitored against the backdrop of an increasingly sensitive market. For CFOs, the (multi-) million-dollar question is: how can I prepare for the uncertainty ahead while operating with a lean team?

CFOs face the immediate challenge of quantifying the short-and-long term impacts of inflation, the potential for interest rates to rise, and other market shocks on their portfolio. The first shock was the public markets' sharp decline in the spring of 2020 and the subsequently fast rebound as federal policy flooded capital back into the system. This forced firms to quickly review portfolio valuations while responding to real-time investor concerns. The subsequent variations by sector, with unique plunges or surges in areas like hospitality and transportation, added to the complexity of translating data into quality portfolio valuations for investors. These rapid changes required an up-to-the-minute view of asset valuations that was previously unheard of in private assets.

With the growing complexity in the investment environment, finance teams increasingly work with an "all hands on deck" approach to valuations. Firms need solutions to better automate valuation methodologies so that they can quickly iterate on fair value metrics without increasing their demands on deal professionals. Limited partners are more often requesting ad-hoc portfolio valuation insight on key deals as market dynamics shift, rather than waiting for quarter-end results. The consequence is a taxing cross-functional process with both intra-quarter valuations and regular reporting.

Given these reporting trends now coincide with growing portfolio asset counts and deal sizes, many firms are beginning to "hit a wall" with their current processes and spreadsheet modeling exercises. More complexity has meant increased time spent updating valuations, with smaller firms in particular lacking the resources to outsource or expand their internal teams. This leaves many firms with a patchwork process that is draining, reactive, prone to error, risk, and other inefficiencies.

Technology can play a key role in automating and streamlining private market valuations. Adopting the right software not only de-risks manual processes, but also helps firms gain bandwidth while saving on resources. As the environment firms operate in becomes more complex, the industry is looking for more powerful and reliable tools to automate fair value reporting.

IHS Markit helps clients automate valuation processes with Qval, a software-based solution used by 160+ PE and VC firms. Qval solves the challenge of combining necessary market inputs with private asset performance in a collaborative workflow that creates a single place for teams to work together and iterate on fair value reporting. Qval alleviates the demand for more responsive valuation insights by making it easy to refresh data with the click of a button.

What will the next market swing mean for private market investors? No matter the cause, for CFOs it will likely mean more inquiries from limited partners eager to understand the impact on their portfolios. Preparing for these moments and the sustained trend towards responsive valuations requires a re-think of the status quo and a move toward technology enablement.

Learn more about Qval and our full-service valuation offerings for private markets.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.