The Covid-19 lockdown dislocated the EIS funding world. Anticipated inflows of investment fell sharply in March. Some portfolio managers were no longer able to make some planned new investments nor to provide follow on funding that some portfolio companies were relying on. Essentially the dynamics of the marketplace were sufficiently disrupted to cause investors to pause for breath.
Small high growth businesses need regular funding to support their ambitions. Many, but not all, companies that were priced for growth earlier in the year were suddenly struggling for cash in April and May. These companies are desperate to attract more funding, but investors remain reticent to invest unless and until they know that they are providing capital to companies at fair value. This point did not take long to gain recognition.
On 31st March this year the International Private Equity and Venture Capital Valuation Guidelines (IPEV) were updated with Special Valuation Guidance from the Board in the light of the impact of Coronavirus. They wrote:
‘It may no longer be appropriate for recent transaction prices, especially those from before the expansion of the pandemic to receive significant, if any, weight in determining fair value’
and
‘Greater uncertainty translates into greater risk and increased required rates of return, which generally would indicate that multiples will decrease, even in the absence of recent transaction data’.
In the pre-pandemic private equity market, fair value would typically be derived by competing investors keen to take part in further funding rounds. However, in today’s market, there may be a lack of suitors looking to invest in follow-on funding, leaving potentially just one existing shareholder willing to provide the extra cash. In this situation, their dilemma is how to price the shares for the follow-on funding.
Consequently, there is an urgent need for valuations of private companies to be reconsidered, both at the fund level and on an individual basis. This is required to provide a realistic guide for transactions, to support portfolio reviews, and to restore investor confidence.
In these circumstances, an independent valuation can be of considerable value to an Investment Committee or a Board of Directors – and a third-party assessment provides an additional layer of due diligence. It is also just as important for investors.
Hardman & Co believe that using independent valuations to inform each interested party is an important step in restoring confidence to the EIS markets.
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