What Mark-to-Market? PE Firms Keep Portfolio Valuations Steady

Dear reader: I plead appalling naiveté when it comes to mark-to-market accounting. You see, I had assumed that FAS 157 would result in private equity firms using public market comps when valuing their portfolio companies. As such, my theory was that the S&P 500 losing more than 11% of its value in Q1 would be coupled by double-digit declines among typical PE portfolios. When that same index rebounded in Q2 by more than 15%, we’d see some corresponding leap in PE portfolios. Not a perfect mirror, of course, but at least something reflective.

Silly me.

New data from Cogent Partners shows that the median buyout fund write-down was -2.1% in Q1 2009, while the median VC fund write-down was -2.8 percent. In fact, only 15% of all funds examined by Cogent reported a percentage decline greater than that of the S&P 500.

Cogent also found a lack of private/public correspondence in Q2, when the median buyout fund was written up at 1.1% and the median venture fund was written down by -1.2 percent. (Note: Q2 sample sizes are smaller)

Does this mean that private equity firms (and their accountants) are simply eschewing public market comps, in favor of static conservatism? That’s what I asked Katita Palamar, head of operations for Cogent’s research business unit. She replied:

“It may be that, even though the public markets have gone up, funds should actually be written down further. Most LPs would agree that funds should have been written down more in Q4. So by not writing up their funds at Q2, they were in effect writing them down relative to public markets without any of the scrutiny of true write downs. I would not expect to see many GPs write up funds at Q2, as the rising public markets may narrow the delta between current portfolio marks and the real portfolio intrinsic value.”

Go here to read Cogent’s entire Q1 report (the Q2 numbers were run for peHUB, but have not yet been otherwise published).