Gen II: Sponsors expect Q2 to hurt valuations more

Most first quarter valuations are already finalized, but a study from fund administrator Gen II Fund Services gives some insight into how fund managers expected the pandemic to affect their valuations as they worked through them in April.

Fund managers expected their first quarter evaluations to drop by as much as 50 percent due to the pandemic, according to a study by fund administrator Gen II Fund Services of more than 150 of its clients in April. But, Gen II said, the second quarter “is where sponsors expect to see more significant effects on their portfolio investment valuations.”

Around half of respondents projected a decrease in first quarter valuations, as of April, according to the study.

What is your estimate of the overall change in your funds’ portfolio investments’ valuation at March 31 as a result of the coronavirus pandemic? (% of respondents)

But nearly 80 percent said they expected an impact. That still leaves one-fifth of respondents who thought their investments were isolated from the crisis, at least at the time they were polled, while 70 percent didn’t think there would be a pandemic-related impact on their fund economics.

Will the effect of a significant mark-down in the carrying value of your funds’ investments cause any of the following? (% of respondents)

The study, which wasn’t published publicly, gives insight into what managers were thinking as they worked through their Q1 valuations, many of which have now been released to investors. Buyout firms represent about two-thirds of respondents, with growth equity representing about 15 percent. Other respondents included real estate, energy and infrastructure, fund of funds, venture capital and credit. Slightly under half of the respondents have $1 billion or more under management.

What is your PE AUM ($) per form ADV? (% of 150 respondents)

Add it back?

Most respondents (more than 60 percent) planning to treat the impact of the coronavirus pandemic as a normalization adjustment to EBITDA were as yet unsure how they would calculate it. About 15 percent would use a run-rate pre-covid, and more than 10 percent would add back losses due to the pandemic. Some 5 percent each responded “reduction-in-force adjustment” and “other”.

If your firm is planning to treat the impact of the coronavirus pandemic as a normalization adjustment, how is your firm planning to calculate the adjustment? (% of respondents)

About two-thirds polled planned to hold investments acquired within the past 12 months at cost for March 31 marks. The rest planned to mark them down.

Meanwhile, 80 percent of respondents planned to use public market comps in conjunction with “other metrics”, with some 5 percent saying they would primarily use public comps and more than 10 percent saying they would not use public comps at all.

Will you be primarily relying on public market comparable metrics in your valuation? (% of respondents)

More than a quarter of sponsors expected to inject additional equity into 10-25 percent of their levered portfolio investments.

In what percentage of your levered portfolio investments do you expect to inject additional equity? (% of respondents)

The survey didn’t draw any concrete conclusions as to whether respondents felt they and their portfolio investments were equipped to revise 2020 projections to consider the economic effect of covid-19. A quarter of respondents said they were fully equipped to do so, with more than 10 percent “partially” equipped and 60 percent unsure. Less than 5 percent were not equipped to revise projections.

Most sponsors also said they would keep to a quarterly schedule for giving investors qualitative information about how portfolios have been affected by the pandemic.

How often do you plan on providing investors with qualitative information regarding the effects of the coronavirus pandemic on the fund’s portfolio? (% of respondents)