By Jaime Hildreth & Andrew Cisneros
Valuation has always been a challenge for the private markets. But as valuation technologies have evolved, the process is becoming more transparent, reliable and accurate than ever before. In fact, valuations are now one of the richest sources of financial data for GPs, fund of funds and investors alike.
But are the private markets taking full advantage of the opportunity?
A recent panel discussion at iNTERACT New York 2019 examined the current state of the valuation process across the industry by talking to leading practitioners about how they are leveraging valuation data to drive more value-creating activities.
A New Era in Valuations
Spreadsheet-driven valuations have served the industry with varying degrees of success for decades now, but the emergence of database and platform technologies have dramatically changed the approach to valuation for the private markets. Traditionally, the goal was to survive reporting season with valuations completed on time and without challenge. Now, it’s to use the data collected during the valuation process to enable more informed, effective investment decisions. And that valuation data isn’t only driving decision-making for GPs. It’s also being used by fund of funds and LPs to help them evaluate which companies and GPs to invest in.
Early adopters including Hamilton Lane and Blackstone are already actively using valuation data to inform decisions and elevate performance, but how widespread is this practice?
Since iNTERACT coincided with baseball season, we used a baseball analogy to measure the industry’s valuation maturity. Using a flash poll of 71 session participants, we asked who still hadn’t made it to first, who had rounded one or more bases and who had actually made it to home plate. What we discovered is that few of us have hit a home run, but most of us have our eyes on the prize. While only 13% of market participants report that they are able to use the data collected during the valuation process to drive value creation, a full 68% said they want to get there within two years.
“The old home run for many fund managers was to survive reporting seasons with valuations done on time and without challenge. That is the minor leagues. Valuations in the private markets has evolved well beyond strictly financial reporting into the major league, the value creation game.” Michael Athanason, Portfolio Valuation Process Consultant
With so few firms having begun their journey towards the goal, there is obviously a need for more clarity around how to achieve it. With that aim in mind, IHS Markit presents the key findings of the flash poll and a description of each step in the journey towards success in the “major leagues” of data-driven valuation.
“We independently value our co-investment positions, and in doing so we rely heavily on the data and timeliness of information from GPs. It’s critical that we get quality information quickly enough that we can generate or own independent view. Senior leadership has a tremendous appetite for data and analysis and we need ways to get it to them.” Samantha Leandri, Principal, Hamilton Lane
38% Are Still on the Bench
More than one in three private market participants (38%) have not yet begun their journey towards data-driven valuation. These firms are running valuations using manual processes and spreadsheets, and their main goals are to get valuations done on time and without challenge.
15% Have Reached First Base
Only 15% of participants have reached first base, which means they have begun the process of getting digital command of the data flow. This initial step involves digitizing the data and consolidating it into a single, validated source of truth.
21% Have Reached Second Base
More than one in five participants (21%) report reaching second base, which means they not only maintain their portfolio data in a digital, cloud format, but are able to flow that data into their valuation process.
At this point, the firm is focused on using valuation data to track investment performance and escalate risks about the portfolio and certain investments. They are using valuation technology to automate the production of a standard valuation report that is as accurate and nuanced as one that would be produced by a portfolio valuation consultant.
13% Have Reached Third Base
Only 13% of participants report that they have reached third base, which means that they are able to extract learnings such as value attribution to inform the valuation process going forward. Their use of technology is more advanced, and they are able to integrate richer data sets that support the objective measure of fair value using trade data, minute-by-minute debt pricing and developing country risk metrics.
13% Have Hit A Home Run
Another 13% of participants are demonstrating a best-practice approach to valuation. These early adopters have invested in data collection and analytics that enable them to make informed decisions about which companies to invest more or less in—and, in the case of LPs and fund of funds, which GPs to invest more or less in—and investment teams are using this knowledge to drive value creation.
“The signs are really encouraging in that the industry is thinking well beyond financial reporting when it comes to the valuation process. In many respects, it allows those involved in the valuation process to focus more on the “fun stuff”, the value-add activities and insights. But, as we’ve learned across our IHS Markit client base, it begins with recognizing where you are today in your journey and requires leadership to get up to bat … to start running the bases.” – Jaime Hildreth, Global Head of PE and LP Strategy, IHS Markit.
New data-driven technologies have transformed the possibilities for the private markets, and valuation is the next frontier. By adopting a data-driven approach to valuation, market participants are gaining deeper insight into investment opportunities and making more informed decisions.
Start Your Journey Ready to take your valuations to the next level? Find out how IHS Markit’s platform solutions, advisory expertise and data enrichment services can help. Contact us for more information.