The big test for M2M

Mark-to-market’s first crisis, and why it matters; $2trn CARES Act may not include PE-back companies; Jeffries mourns the loss of its CFO.

Mark-to-market: The ‘mark-to-market’, or ‘fair value’, framework has been around since before the crisis. And yet, this is the first one in which the entire financial industry will be using it to assess their investments. PE in the US didn’t really begin implementing it for their portfolios until around the time public markets were bottoming out in 2009. And there weren’t even industry guidelines to implement it for the sector until years later. In this article, we take a look at what mark-to-market is and why this is such an important test of the framework, as it applies to PE.

Most people I’ve spoken to are still saying their December NAVs will remain untouched by the coronavirus pandemic – so it won’t be until March 31 marks come out (for many, probably not until sometime in May) that we’ll begin to really see how this framework impacts private investments in a serious downturn. With the full extent and nature of the financial and economic character of this crisis still unclear, it may not be until two, three or more markings are published before we can begin to understand what all of this really means to PE valuations, and what consequences the framework will have. Perhaps steeply discounted NAVs will mitigate the dreaded denominator effect? Perhaps it will increase unwanted volatility? Perhaps it will expose the strengths and weakness of various approaches, and perhaps even the managers behind them?

Whatever the result, there will be a lot to learn from it.

CARES: Sister title Private Equity International adds a little color to my piece on LP defaults in its Side Letter this week, adding that part of the lesson GPs learned from the last crisis was to not sit on the sidelines this time around – implying LPs can potentially expect not just capital calls from managers looking to inject cash into their portfolios, but those pursuing deals, as well.

On top of that, PEI staff note the passing of the CARES act and what it maybe does not mean for private equity: access to the stimulus package for their portfolio companies. They write that the language doesn’t explicitly bar portfolio companies’ access to the $2 trillion package, but that it may be difficult, writes PEI:

“The crux of the matter is whether private equity-owned businesses are considered affiliated with all the other companies owned by the private equity firm – and thus likely to exceed the maximum 500-employee threshold.”

Law firm Davis Polk points out that there is some ambiguity to the relevant part of the text of the act, however.

A sad day for Jeffries: The current crisis will likely touch many of us in profound or tragic ways. Among those already to feel it are the family, friends and colleagues of Jeffries CFO Peregrine “Peg” Broadbent, who the firm said on Sunday recently succumbed to the coronavirus. CEO Rich Handler and president Brian Friedman wrote of Broadbent that, “his decency, calmness and dry wit were always there, always making things better,” adding that they will “miss him terribly.” Teri Gendron, the CFO of investment bank’s holding company, Jeffries Financial Group, is stepping into the role of interim CFO and chief accounting officer.

Email prepared by Graham Bippart