Update: I’ve received more details on this study from NYPPEX and included them below.
The Private Equity Council has drawn my attention to a recent report from secondary intermediary NYPPEX, which states that buyout firms have accurately valued their portfolios. While the PEC didn’t exactly explain how it found that, NYPPEX was nice enough to break it down for me. See, the study found that buyout funds net asset values as of June 30, 2009 quarterly reports were only 2.57% over-stated, compared with publicly-traded industrial companies. Enterprise value to EBITDA multiples declined from 9.75x to 6.54x or approx -32.92% for publicly traded industrial companies, versus buyout funds’ worldwide net asset values, which changed approx -30.35%.
NYPPEX tracked industrial companies because it considers those to be good barometers for portfolio company holdings in buyout funds.
Also interesting– NYPPEX expects secondary bids to rise by 25%. Guess all those secondary funds really did miss the bottom… More from the survey below:
“Net Asset Valuation Report” for the third quarter of 2009 involved a survey of 106 buyout funds with $318 billion under management (both invested and committed capital.) The new study discredits the claim that private equity funds overstate the value of their portfolio company investments.
The report concluded that the average private equity buyout fund’s reported net asset value (NAV) is roughly equivalent to the “true” underlying value of the portfolio. This means that the “fair value” of private equity holdings reported to investors is equal to the hypothetical market price of those assets as measured by the market valuation of an index of 1,626 comparable publicly-traded companies.
This finding has several important implications:
(1) It provides evidence that private equity funds accurately state the value of portfolio companies. According to NYPPEX, recent data instills “higher confidence regarding the accuracy of [private equity] net asset values.”
(2) It eases concerns about liquidity and the potential for exits. As NYPPEX writes, “buyout funds with 2005-2007 vintages are carrying portfolio companies at reasonable valuations based on enterprise value to EBITDA multiples, and are well positioned to generate distributions and exits.” This suggests that investors are well positioned to receive distributions in the near future.
(3) It counters reports of secondary market “fire sales.” While there have been reports that fair values are overstated and that large institutional investors are willing to accept huge discounts on the secondary market to get out of PE investments, NYPPEX anticipates bids in the secondary market will increase by 25%.