IPEV 2022 Highlights

So, in brief:

• More focus on the changing market: while valuation practitioners are brainstorming the approach to the discount rates climbing up and multiples going down, IPEV asks for more vigilance when it comes to analysis of applicability of market multiples and rates. Blindly dragging transactions from earlier periods is no longer an option, while current distressed multiples for some industries might be misleading too. The challenge is to differentiate the temporary trends from permanent changes and do it on a case-by-case basis.
• Book value of a loan can be far from fair: as governments fight inflation, interest rates are spiking up driving the value of debt instruments down. For how much depends on the obligor’s credit risk profile, maturity and coupon of the loan with recoverability also becoming more and more an issue.
• All shares are equal but some shares are more equal than others: the focus is on the difference in the value of preferred shares vs common shares in a complex capital structure. While investors are generally looking at all shares in an investee on a common equivalent basis disregarding liquidation preferences and other additional rights of preferred stock, this approach overlooks value associated with the downside protection some shares have vs others. In case of a potential impairment or other adverse events, the value of downside protection might be too significant to ignore. To correctly reflect the difference in value of share classes with different economic rights, option based models and scenario analysis are applied.
• ESG: hot valuation topic of ESG was also touched upon in the updated IPEV guidelines. No specific guidance was given though, just common sense observations that both qualitative and quantitative factors related to ESG investments might affect the fair value. Apparently, it is largely a matter of judgement how you reflect them in the valuation.
• Transactions after the valuation date: might be applicable for FV purposes if known or knowable as at the valuation date. So, future rounds might be a basis for the valuation, however judgement should be applied as to what adjustments, if any, are applicable.